News from Pyramid Scheme Alert.org

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All over the Internet one burning question plagues the multi-level marketing (MLM) business. That question is whether MLM is legal or not. And, if some MLMs are legal and others are not, how in the world is a consumer supposed to know which ones are the financial traps? The question of MLM's legal status is unique in the business world. Some industries have crooks and thieves in their ranks; but only in MLM is the basic business model questioned for being crooked. The closest analogy is the cigarette industry in which the legality of its basic product is in question due to its causal association with consumers deaths, illness and addiction.

In MLM, seemingly honest people - with no criminal record - are running scams, just as nice people also push lethal cigarettes on young people. Also, since virtually allMLMs, legal or otherwise, produce the same 99% loss rates among consumer/investors, how could consumers that lose money and waste months or even years of time know whether they were defrauded in a scam or "failed" in a business? And how much "disclosure" should be required for a business that lures investors into a "business opportunity" with a 99% failure rate? (see article below)

Now, the state of Montana has shut downthe statewide operations of one of America's most popular and fastest growing MLMs, Kentucky-based Fortune High Tech Marketing. The prosecution brings the question of MLM's legality into sharper focus.

FHTM claims to have 160,000 "salespeople" and nearly $500 million in revenue. The scheme was launched by an MLM veteran, with wealth and success gained from an earlier MLM that was similarly popular and fast-growing, Excel Communications. If this guy did not know what was legal in Montana, how are consumers supposed to know if his scheme is legitimate? And if it is illegal in Montana, what about other states? (Note: Excel skyrocketed with sales and MLM distributors and then sold stock as a public company: sales growth soon declined as did the stock; eventually Excel was acquired and later went bankrupt, wiping out all the MLM distributors and the shareholders)

One other state, North Dakota also brought charges against FHTM but they were quickly "resolved" and the scheme appears to be operating again in that state, though the charge that it is a pyramid scheme was not clarified.

Some consumers believe that if a MLM company is a member of the Direct Selling Association (DSA), that certifies legality. But, the state of California recently prosecuted the DSA member, Your Travel Biz.com, as a "gigantic pyramid scheme." So much for DSA membership as a valid criterion.

The DSA claims its "code of ethics" ensures legality because the members abide by state laws. But, the code only cites the laws in a few states where the DSA lobbied for changes in MLM's favor. In short, where the law allows "endless chain" recruiting, the DSA considers schemes that abide with those lenient laws "ethical" and "legal" and ignores violations in other states. This is self-serving to MLMs, but harmful and dishonest to consumers.

Then, many people have looked at previous prosecutions of the US Federal Trade Commission (FTC) that applied the standard of "retailing" as a measure of MLM legality. However, the MLM industry has obscured and confused this issue to the point of uselessness. Some MLMs charge the salespeople exactly the same price as retail customers, eliminating the concept of wholesale and retail. Others require a handful of retail sales per month - not enough to earn a true profit - and claim this satisfies FTC requirements. Some MLMs claims the FTC no longer applies retail sales requirements.

Some states have also inconsistently applied retail levels as a test of legality. North Carolina, for example, has made settlements with some MLMs in which the state required that at least 70% of all revenue had to come from non-salespeople. This "non-salesperson" category included families of salespeople and the people who joined as customers and then became salespeople. In other words, the state wanted to be sure that the company really was a direct selling business based on true market demand for its products, and was not depending on purchases from the salespeople themselves - growing due to deceptive endless chain promises. If this requirement were applied to the MLM industry, virtually all MLMs would shut down.

In its lobbying campaign, the MLM industry argues that as long as money is channeled through product purchases (rather than just being put in an envelope and quietly passed from downline to upline, everything is "legal."

MLM companies have many ways to hide how much of their revenue comes directly out of the pockets of the salespeople. Some only count "active" salespeople. In this way, all the money coming from those that are "inactive" is counted as revenue but the salespeople themselves are not counted, thus raising the average "income" averages. Others only count salespeople that were "active" during a short time period, so the the churn/quit rate is hidden and the number of salespeople is misleadingly presented as much lower than it really is. All these various tactics serve to hide the essential fraud of the MLM industry -- the use of the endless chain to induce sign-ups, purchases, and marketing effort from consumers and to hide the massive losses that the fraud inflicts.

The total losses to consumers from all these diversionary tactics by the MLM industry add up to far more than was lost in the Bernard Madoff Ponzi scheme. In MLM, the pyramid scam is perpetrated in the open, using only disguise and diversion rather than concealment, as Madoff unsuccessfully employed.