Most MLMs based on deception

The Sunday story "Healthy Business," by Jesse Hyde, contained a sidebar "Recruiting firm is accused of fraud." My research shows that most of the multilevel marketing (MLM) firms operating in the state recruit an endless chain of participants -- who are their primary customers. This essentially makes them pyramid schemes, since the primary pay emphasis is on income (overrides) from recruitment and not from legitimate sales to non-participating consumers.

While the article was informative, I want to debunk some arguments quoted by MLM spokesmen to support their legitimacy:

According to Neil Offen of the Direct Selling Association (DSA), "Ninety percent of MLM distributors . . . grossed less than $5,000 in 2003. . . . We may have a woman who makes $500 a year. Is she a failure? H---, no. She's achieving her objective."

This is the classic straw man argument that deceives those unfamiliar with the facts -- put forth a weaker argument, then shoot it down. The truth, supported by evidence from court records, company statements and tax returns, is harsher. It isn't a question of working part-time for "supplemental income." Almost all MLM recruits LOSE money. This is far different from EARNING very little money.

In fact, if you count all participants who sign up for "recruiting MLM" programs (which reward recruiting over actual selling -- like Nu Skin/Pharmanex, Amway/Quixtar, Usana, Neways, TNI, etc.), and subtract all expenses (including products purchased to qualify for commissions and advancement), close to 99.9 percent lose money. Yet prospects are led to hope for substantial "residual" income. Obtaining money through such blatant misrepresentations should be considered theft by deception or simple fraud. If anyone doubts this, they should review the research reports on my Web site - - www.mlm-thetruth.com/mlm_research.htm

Nu Skin's spokesman, John Peterson, boasts of distributors making "$40,000-$70,000 a month. . . . We make millionaires." Since those at the top of the pyramids profit hugely at the expense of thousands of participants who lose money, is this something to be proud of -- or cause for shame? Download the "Report of Violations" of the FTC Order for Nu Skin to stop its misrepresentations at -- www.mlm- thetruth.com/Complaint-2FTC6-3WebFormatted12-4.pdf

Peterson echoed the DSA refrain, "It's true that there are only a few people at the top, and those at the bottom may be only making $200-300 a month." Has Peterson communicated with any of the millions of Nu Skin ex-distributors? Approximately 99.94 percent of participants LOSE money. Spell it, John -- "lose" -- not "small gain."

Speaking of the DSA, Utahns can thank courageous state senators who defeated deceptive DSA-initiated legislation this past session that would have legitimized any product-based pyramid schemes that offered an "inventory repurchase" program. The worst schemes already have such programs, which don't begin to compensate for losses suffered by participants.

Two more fallacies cry out for correction. Charles Allen says, "The fact that Nu Skin has been around that long proves it's not a pyramid scheme." Baloney. Nu Skin survives by Ponzi-style "expansion" from country to country and from division to division. It is literally plundering Asian nations of hundreds of millions of dollars every year. (See "Report of Violations.")

Many ask, "If MLMs are so bad, why don't the authorities shut them down?" Primarily because victims almost never file complaints. They blame themselves for their "failure," or they fear consequences to the close friend or relative that recruited them. Also, in any endless chain selling scheme, every major victim is a perpetrator, since they must recruit to recoup their investment. They fear self- incrimination.

And the final fallacy by Offen of DSA: "To say we're not a legitimate industry -- that's absurd. How can you argue with Avon?" This is like saying "How can you criticize illegal drug cartels -- look at Pfizer!" What's absurd is to present Avon as typical of the MLM industry. Avon rewards fairly its representatives for selling products -- far more than for recruiting. Orders are filled as they come in -- no incentives to stock up or meet ongoing purchase requirements.

With 10 years' research, I can say with confidence that to be successful in a recruiting MLM, one must first be deceived, then maintain a high level of self-deception and then go about deceiving others.

Jon Taylor, of the Consumer Awareness Institute, is a business educator, writer and retired entrepreneur.

Copyright C 2005 Deseret News Publishing Co.
Provided by ProQuest Information and Learning Company. All rights Reserved.