Under the subtitle “Legions of Losers”, the first chapter of PONZINOMICS begins:
“Those who encounter enterprises such as Amway, Nu Skin, Mary Kay, Avon, Usana, and hundreds of others, have a universal experience: loss. The failure of millions each year is its calculated product on which MLM gains its returns and, therefore, the true story of MLM must be a tale told by losers.”
The US Federal Trade Commission (FTC) has now joined the legions of MLM losers. Its 4-year long case against one, relatively minor MLM was rejected by a federal judge. MLM won. FTC lost. Like millions of consumers that suffer loss from MLM, the FTC can now, finally, face the truth about MLM, but will it?
The name of the MLM in this FTC downfall is not worth noting. It is utterly typical. Seen one MLM, seen ‘em all. Like countless others, it sells a “groundbreaking” supplement, said to be a “health” product, with a “patented” ingredient. Like all MLMs, it offers an “extraordinary income opportunity.”
During decades of rare and anomalous prosecutions against small and almost unknown MLMs, the FTC steadfastly maintained its overall policy that “MLM is legitimate direct selling.” Previous prosecutions never led to any wider investigation. More and more MLMs were launched; more people were lured into them; all were led to believe – by the FTC – that MLM is “legitimate.”
This time the FTC’s position of endorsing “MLM” while claiming one particular MLM – that looks and acts just like all the others – is a pyramid scheme, didn’t fly. This time the parsing of “false claims” and “recruiting vs. retailing” data didn’t cause the court to see anything more than a typical MLM. The brutal and delusional cult world of MLM where “everything is possible if you believe” was not in the courtroom, just a collection of testimonials, video clips, and analysis of statistics, that add up to nothing that couldn’t be produced from any MLM anywhere in the world.
In sum, the ruling enforced the longstanding Big Lie of the MLM industry that MLM is “direct selling.” But the FTC’s prosecution of the case was also based on a version of the same Big Lie – that MLM is direct selling, except for this one. Both in the ruling and in the prosecution, the realities of cult and racket and the international outcry against MLM’s predatory solicitations were absent and ignored.
The court rejected the FTC claims of income and product deception and pyramid scheme. The ruling relied on the invented version of reality that the MLM industry promotes – and which the FTC authoritatively confirms in its blanket endorsement of MLM’s “legitimacy.” FTC lost this case against disguises, claims, justifications and defenses that all MLMs always use, and the public has lived with for decades. Call it an institutional “delusion”, the FTC’s own policy of denying MLM reality set it up to lose, just like millions of consumers are set up to lose when led to “believe” that “MLM is legitimate direct selling.” What goes around really does come around.
Here’s a summary:
1. Pay to Join; “Endless” Recruiting Chain; Recruit to Gain Rewards; Money Transfers Up, Forever – Not a Pyramid Scheme and No Deception. It’s MLM!
In the MLM that the FTC prosecuted (and lost), everyone is urged to recruit as many new “salespeople”, in each area, as possible. There is no provision for market saturation because the MLM’s income opportunity is said to be “unlimited.” It is “unlimited” because the recruiting chain is said to be “endless.” No matter when a recruit gets recruited, the “opportunity” is said to be undiminished. The price to join never goes down. Everyone always can be as successful as the first person to join, because everyone can build a huge “downline”, just like the gurus on stage did. This is the mantra of every MLM on the planet. It is equivalent to selling an infinite number of shares of the same stock. In MLM, the FTC calls this legitimate.
Because of this FTC policy, in this case, the FTC did not – and could not – argue that this MLM’s endless chain itself is deceptive on its face or that such a model is a pyramid scheme just by its design. There are hundreds of MLMs operating exactly like this one. In fact, paying to secure a position on an endless recruiting chain and then selling more positions on the chain is the defining characteristic of MLM. That is the advertised “opportunity.”
Also because of its policy, the FTC did not – and could not – argue that the MLM cannot possibly fulfill its income promise to any but a few at the top, no matter how much all the recruits might “try” and “work”. It could not argue the MLM endless chain is fraud per se. The FTC did not argue that there is no such thing as an “endless chain” or a “non-diminishing” market and charging money to join such a “chain” is inherently fraudulent; or that incentivizing unlimited recruiting makes profitable retail selling impossible by adding more competition and diluting markets and therefore calling it “direct selling” is deceptive. If it had, the FTC would indict the entire MLM industry and contradict its own policy about “legitimacy.”
The judge applied the FTC’s overall view of MLM to this MLM, and rejected FTC’s claim that this one MLM, among all others, is a pyramid scheme.
2. No one “Gets Paid to Recruit” (but Only Recruiters Get Paid)
Those at the top don’t just make more on higher volume in MLM. The MLM pay plan assigns much higher rates of “commission” to those higher one the recruiting chain. In this MLM the FTC prosecuted there are 18 “ranks” based on recruiting levels. Most of all the commission payments go to those in the top “ranks” by assigning additional “bonuses” to the top positions. The money for the “bonuses” comes out of the purchase payments of all recruits below. In most MLMs, 40-50% of the “wholesale” price is transferred to the recruiting chain, with most of all the money going to the top 1% of recruiters. The “top loaded.” pyramid “compensation” plan is standard MLM.
But, the judge ruled, this is not “paying to recruit.” That would be a pyramid scheme. This is MLM. The “commissions” paid to the recruiters come from “sales.” They are not direct payments for recruiting. Citing the FTC’s ambiguous history, guidelines and advisories, about what is “sales”, who is a “customer”, what is “retail” and what is “personal use”, the court did not see how this MLM, out of all others, is a pyramid scheme. All MLMs generate their money from the recruits buying and sometimes even selling products. All MLMs pay “commissions” and “bonuses” gained from “sales” and transfer them to the top ranks of recruiters, while promising everyone they too can be at the top because the chain is “infinite.”
3. It’s “Direct Selling” but without Retail Customers and without Profit from Personal Selling
In the MLM the FTC prosecuted, it turns out that almost nobody outside the MLM, meaning consumers in the open, competitive market, buys the MLM product. And nobody inside the MLM makes a profit from personally selling it either. Products do move from the company to the MLM participants, but not based on any known economic or marketing principle. They serve as “crypto”, a substitute for plain cash payments. The pyramid money is included in the “price.” The net result is a massive money transfer.
The product is not advertised. The recruits can’t sell it on ebay. It’s virtually unknown. And, it’s expensive as all heck! Each pill costs $3. Taking one daily, as recommended, costs over $1,100 a year! So who does “buy” it and why?
What do you know, almost all the MLM “customers” turn out to be those who sign an “agreement” with the MLM and are granted a special “discount” status. Only 1% of the company’s revenue was verified as “retail” purchases, paying retail price, like in real direct selling.
Included under the “discount” status are the “salespeople” themselves plus a few people that some salespeople each recruit, many of the whom also become salespeople. They are called “preferred customers.” On average each “salesperson” has just 4 “preferred customers”, and those “customers” get a special “discount,” so there’s almost no retail profit from selling to a few “preferred customers.”
The “salespeople” and the “preferred customers” are both called “discount” buyers though almost no one on earth pays the full retail price. The word “discount” is not about market economics. It’s about membership in the chain. “Discount” is a euphemism. Wink wink, nod, nod. The “discounters” are the only “customers.” “Customers” is a euphemism too. Since virtually nobody pays “retail”, virtually nobody gains a retail profit. The “customers” and the “sellers” are really one and the same. But the FTC still treats this system, used by hundreds of MLMs, as “legitimate direct selling.”
The FTC does say that if a MLM gets its money from the recruits on the recruiting chain, more than from “retail customers” and “end-users,” who are not on the chain, it’s likely a pyramid scheme. But this guideline is as nonsensical as salespeople recruiting their own competitors. Profitable retailing is impossible. The FTC distinction between legitimate MLM and a pyramid scheme is a distinction between a pyramid scheme and a non-existent business, like comparing horses to unicorns. No one could successfully “retail” if more and more “retailers” are being recruited in every area. An endless chain of “retailers” and actual retail selling are mutually exclusive. Add to this fact, that MLMs offer “unlimited” rewards for recruiting more salespeople, making even the very effort to “retail” a fool’s errand.
The FTC winks at this reality by not requiring MLMs to verify retail sales or retail profit or disclose any “average” profit from retailing. FTC pretends it doesn’t know and lets the MLM companies also claim they don’t know! A retail-based MLM exists as a myth, on which the FTC constructed a federal law enforcement policy!
The MLM “industry” plays along with this charade by claiming most of the “salespeople” are really buying for “personal use” not to get access to the amazing income “opportunity.” On its face, this is insane. Who turns down the “opportunity of a lifetime” only to get a non-existent discount and then stops buying in a few months?
That there will be millions buying, but virtually no profitable selling, per salesperson, can be known from the start, based on the scheme’s design. There’s no need to search for motives and dig up evidence of “deception.” But since the FTC calls the deceptive design “legitimate”, it can’t now claim consumers were duped just by having been recruited. The hapless FTC attorneys have to divine the minds of the recruits to “prove” they joined to make money, not to get “discounts” and for “personal use.” Further, FTC attorneys have to “prove” recruits were misled by specific, false “income claims” rather by the very nature of the scheme itself.
Outwitting the FTC in this fixed game, MLMs play hide and seek. They let their “top guns” make outrageous income claims and then say the company is not responsible for those claims. They also know that recruits either don’t know or will not admit they were duped by their friends or that they vainly hoped to get rich, so when asked why did you buy those ridiculous, overpriced products during the few months you were “active”, they usually will say, as the MLMs advise them to say, “We joined to get a discount”, even though they never buy the stuff ever again.
“Proving” deception in a scheme based inherently on deception turns out to be almost impossible. When a liar lies all the time, the truth disappears.
MLMs can get away with all this nonsense about “personal use” and “discounts” even though the salespeople are legally defined as “distributors” and are authorized to resell the products; and even though they are charged “wholesale” and their purchases qualify them for “commissions” based on recruiting. None of this has ever prompted the FTC to take a closer look at the “industry.”
Further, MLMs can claim “preferred customers”, also constitute “customers” though each salesperson on average has just 4 such “customers”, who buy at at “discount” and, in this case, those “customers” only stay active 2 months, on average. “Preferred customers” can’t “sell”, but that’s not much of a difference, since most “sales” people will never make a sale anyway. Those few that do, don’t make a net profit. The distinction between most “salespeople” and “preferred customer” is one without a difference. In fact, many are one and the same. A third of all the “salespeople” start out as “preferred customers.”
Those are all the “customers” that make the MLM “legitimate” and not a pyramid scheme, according to the court. This is how all MLMs work, which the FTC treats as a “legitimate” industry.
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Interlude:
Okay… according to the judge and to the FTC, an income proposition based on endless chain recruiting is not inherently deceptive, not a pyramid scheme on its face; and transferring most payments from everyone on the recruiting chain to the top recruiters is not “payment to recruit”, and it’s not unfair that all the others make no money, so long as the money flows through “product buy-sell transactions.”
But what about the making false health claims to get people to sign up?
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4. It’s Not Snake Oil; Read the Fine Print!
The MLM sells what it calls a “brain” supplement. It’s contains an extract of coffee that is “patented” and it costs $3 a pill. Taken as recommended costs $1,100 a year, so this must be some serious medicine. Right?
Except, the “patented” ingredient has never been tested on humans. There’s no clinical evidence it does anything positive for human brains or for human health at all. It’s not approved by the FTC for any health purposes. In fact, it is illegal to claim it cures, prevents or treats any human ailment.
Despite all that, somehow or another, tens of thousands of the MLM’s recruits came to believe the product improves brain function and treats brain ailments like Parkinson, concussion and Alzheimer’s. Somehow, they came to believe the MLM product is a medical breakthrough, and they are spreading its wondrous benefits.
Where did they get this idea? The FTC argued that they were lied to and misled by the MLM. And recruits believed the lies. But the court ruled that if recruits were tricked, it was not by the MLM itself, based on specific evidence presented by the FTC.
During the trial, it was reported that some recruits might have told other recruits that the product is a medicine for the brain. It was also reported that the MLM company invited the manufacturer of the “brain” product to speak to the recruits at one of its exciting MLM rallies, and at the event the manufacturer seemed to connect the “brain” product to brain health and therapy. But, in its “policies”, the MLM officially prohibits its “sales” reps from repeating what the manufacturer said to them when he was their guest speaker.
So, the judge ruled that if any recruits do make “health or therapy” claims, they are violating the MLM’s rules. It’s their bad, not the innocent MLM’s, so no health claim deception by the MLM.
Miracles
The FTC claimed all these thousands of recruits were somehow persuaded to ignore the “disclaimer” and instead believe they were promoting a medical miracle, even though none of them has any medical qualification. Were the recruits really that easily fooled by the hype for this “brain” supplement? The FTC makes them out to be.
But, there’s just one catch. While the FTC condemned the false claim of a medical miracle by the MLM, it endorsed its false claim to an economic miracle – the endless chain, the non-diminishing market, the “infinite” income opportunity. The recruits were led, with FTC backing, to believe that they had joined the greatest opportunity on earth, making the MLM leader a prophet and a guru, and making them among the luckiest people on earth to have found the opportunity. They believed they were in a real “business.”
So, is it so far fetched for recruits to believe that this “business”, an economic miracle, might sell a medical miracle? Since it is a “breakthrough” business, unique in the world, an alternative to the mainstream economy, why wouldn’t its product also be breaking new ground in the health field? Why wouldn’t it be far ahead of the FDA? Why wouldn’t those “disclaimers” just be legal mumbo-jumbo, to prevent lawsuits and such?
When people enter the fantasy world of MLM’s “endless chain” – which obviously does not exist but has the backing of the FTC as a real business – they are also told that, in this business, “reality is what you believe and everything thing is possible.” That’s the secret to success in this miracle business. If the endless chain is real, and it works if you believe in it, why not a pill that treats Alzheimers?
Trapped in its own fantasy-world policy where “endless chain” scams are “direct selling”, the FTC had to argue that the recruits were so gullible and unwitting as to ignore the disclaimers and believe the ridiculous hype. In reality, recruits were subjected to a sophisticated entrapment and mental manipulation. They were set up for a “product scam” involving a miracle medical product by being lured into a financial scam, where the “business” opportunity is “unlimited” for all. In this government-endorsed “business” believing makes it all true.
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Interlude:
Okay, okay… according to the judge and the FTC, MLM recruits sign up as “salespeople” or as “preferred customers” for “discounts” on products they “demand”, even though nobody pays retail, and the “discounters” quit in a few months. So they get counted as “customers” and “end users.” And, the MLM is not also not responsible for any false notions the recruits might have about miracle cures and treatments.
But what about all the money, and time people lost and what about their hopes and dreams that got raised and were dashed? What about the ruined families and friendships? Weren’t they deceived about the “income opportunity”?
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5. There’s No Income Deception! They Can Read the “Disclosure”
Cold, hard facts about the“income opportunity” of the company in the FTC case:
- Of all the people who ever signed up, 93% quit, and most of the 7% currently enrolled signed up within a year or so. So, over time, just about everyone quits within a year.
- Only 3% of all who ever signed up currently make any income at all, and that’s not “profit.”
- Six out of ten currently enrolled earn zero commissions.
- For those that make any commission income at all, the average is $3.70 a day, and that’s before all expenses are deducted.
But, wouldn’t you know, somehow or another, recruits in this MLM came to believe the MLM offered an amazing income opportunity, maybe the greatest in the world. At meetings they screamed, clapped, cried and laughed hysterically at their bright prospects. They told each other how great the opportunity is. They profusely thanked their MLM leaders. They believed the MLM offered such a great income opportunity many recruited their closest friends and family to join too.
Where in the world did the people in this MLM get the idea that this MLM was anything more than a financial disaster zone?
Could they have been deceived by the MLM about income the same way the FTC said they were deceived about the miracle “brain” pill? The FTC said, yes they were. The MLM misled and lied to the recruits about “income.” The MLM denied it deceived anyone. The court agreed with the MLM. No one was misled by the MLM, it ruled and the “opportunity” was not misrepresented, based on the evidence the FTC presented. The FTC charge was denied. How could this be?
The answer leads back, once again, to the FTC’s overall policy. The FTC does not require that any MLMs make any “income disclosure” at all. Of the MLMs that do make disclosures, like this one did, it does not impose any guidelines. MLMs are the only businesses that make millions of financial solicitations without having to disclose the basic facts of “risk” or historical loss rates.
The judge ruled that recruits weren’t deceived since they could read the MLM’s “disclosure” that the company voluntarily provided. But, could new recruits really grasp the truth of the “opportunity” from this “disclosure”?
- It does not show how many join and quit in a year. Recruits could not know that virtually everyone quits within a year or so.
- Does not report the “average” for any of the 18 ranks, but lumps them all together into one “average.” New recruits join the vast majority at the dead bottom, not knowing the income average for the newest recruits. The “average income” provided in the disclosure could be grossly skewed by a few people at the top with extremely high incomes, and all others getting next to nothing. The recruits could not know.
- Lumping all “ranks” together, the “disclosure” reports the “average income” of “active” recruits at $1,358 a year ($3.72 a day). It also reports that 60% of the “active” recruits earn zero. So, how could $1,358 be “average” if nearly two-thirds make nothing at all? Making “zero”would be the more “typical.” What percent of all who ever joined actually received $1,358? The “disclosure” does not explain.
The court acknowledged that some top recruiters claimed they had incomes of thousands a month, and presented images of their expensive cars and exotic vacations, all from “commissions” and “bonuses,” giving the impression that high income was within everyone’s reach. But, if the recruits were deceived, the court ruled, it wasn’t the MLM’s fault. It’s against its rules to make such income claims so, if there is fault, it is with those irresponsible recruiters, and, anyway, every recruit could read the “disclosure” showing $1,358 to be the “average” and 60% earn zero.
No Words Needed
As with the FTC’s charge of “false health claims”, there’s a catch to the FTC’s case of “false income claims.” The FTC avoided and omitted the one factor that, more than any other, leads recruits to believe the MLM is the greatest “income opportunity” in the world and to ignore the “disclosure” that shows it to be a financial wasteland. By avoiding and omitting this key factor, the FTC reduced its case to individual claims, promises, videos and pictures. It depicted the recruits as highly persuadable, almost incapable of distinguishing fact from fiction. The judge did not buy it.
This factor the FTC left out does not need anything in writing to persuade, even mesmerize people, as it has shown to do to millions. It does not require verbal testimonials or any specific dollar amount at all. No one has to make a “claim.” The “belief”, in spite of the facts, comes just from being on the MLM “chain.” Signing up and gaining a position on an “endless” chain opens the door to a life-changing “opportunity.” The “unlimited potential”, the hallmark of all MLMs, does not need any words. It can be grasped intuitively, like a bolt of lightning. OMG! If you recruit 5 and they recruit 25 and they recruit 125, and they recruit 625… and you get “commissions” from all of them, forever, you are set for life. Anyone can do it!
That “unlimited potential”, based on the “endless” chain, which all MLMs are allowed by the FTC to present and claim, makes the “disclosure” meaningless mumbo-jumbo, like the health “disclaimer,” just something to satisfy regulators. It’s for lawyers, not meant to be taken literally. Sure, there’s an “average” income but who is “average”? Just look at the opportunity! It’s like a miracle. What “job” could make such an offer? Further, if the opportunity were not valid, how could the recruiting chain be “legal”? How could there be so many MLM leaders saying it’s all possible?
Just as the FTC does not mention how the miraculous “income “opportunity” might lead many to believe in a miraculous “medical” product, the FTC did not cite this basic and obvious source for the delusional impression of high income and it did not cite it to explain why the “disclosure” was not just misleading but utterly meaningless. It did not cite this overwhelming factor because the “endless chain” is legal and legitimate, according to the FTC itself.
6. FTC Set Its Own Trap but There’s a Way Out
The FTC’s defeat was of its own making. The case avoided reality at a level on par with the MLM’s fantastical claims. With its constant endorsement of MLM as “legitimate direct selling” it set up all the conditions for a judge to align with the version of reality told by the MLM industry, and accepted overall by the FTC, rather than the parsed-out facts, data and FTC claims in one case that had no context.
The FTC put itself into the position of essentially depicting the victims as extraordinarily gullible in buying snake oil and a financial trap. It depicts the victims this way in order to cover up the overriding factor that the FTC has used its own enormous authority as a federal agency to endorse the financial trap, the MLM twilight zone where markets are “infinite”, and everyone can be a “boss.”
The FTC’s current policy has licensed pyramid promoters, who are everywhere now. But, there is a simple alternative to its nonsensical policy and futile prosecutions, which may now have ended anyway.
When the FTC spots a company that looks like a pyramid fraud, it doesn’t have to spend years “proving” deception. It doesn’t even have to leave the office to see hundreds of these scams. All it needs to do is refer the pyramid scam to the Department of Justice for a criminal fraud investigation with the threat of jail time for pyramid racketeers. This has happened before. It could be the new policy, since the old one is dead.
Robert FitzPatrick (copyright 2023).
