Mar. 16, 2018
Political power does not equate to good business practices.
Major MLM companies seem to rely on very few measured outcomes as public indicators of a successful business model.
Fraud dressed up as a "business opportunity" is still fraud.
Anyone reading this no longer believes in the existence of Santa Claus but plenty of readers believe in the gift-giving capacity of Congress. The Direct Selling Association (DSA), some large multilevel marketing (MLM) companies, and their Congressional friends such as Representatives Moolenaar (MI) and Blackburn (TN) are again trying to give presents to investors and owners of MLM companies such as Herbalife (NYSE:HLF), Nu Skin (NYSE:NUS), Amway, and Mary Kay, to name just a few. Through congressional friends the industry yet again is trying to sneak a rider on an appropriations bill that would tie the hands of the Federal Trade Commission (FTC) in prosecuting product-based MLM-style pyramid schemes.
The “Moolenaar” amendment would prevent the FTC from prosecuting product-based MLM companies that actually operate as endless recruitment chains with little or no sales to everyday consumers not part of the scheme. The motivation for this strong industry push (a repeat from last year) is two-fold: a string of successful FTC prosecutions and data consistently showing a troubled industry.
Since 2013, four FTC investigations led to three successful prosecutions - Fortune Hi-Tech Marketing, BurnLounge (appellate level), and Vemma - and (as fourth) an important settlement. By agreeing to change its compensation model and undergo seven years of monitoring Herbalife bowed to a sweeping FTC complaint. Then FTC Chairwoman Ramirez famously noted that Herbalife was “not, not found to be a pyramid scheme.” The Moolenaar amendment (and similar bills introduced by Representative Blackburn) would eliminate the FTC’s ability to prosecute these pernicious schemes. Dressed up as support for entrepreneurs, these legislative efforts protect any MLM-style scheme as long as it sells something to someone, even if all the purchasers are recruits who join to get rewards by recruiting others, who in turn obtain their rewards by recruiting others. You understand because you likely have a friend or family member who lost money.
The industry and its congressional friends might say: “A buyer willingly purchased a product, so what’s the problem?” Well, successful pyramid scheme prosecutions highlight two problems. First, the vast majority of those who join in pursuit of rewards will earn nothing - their time and money wasted, often generating losses of many thousands of dollars for each of tens, even hundreds of thousands of recruits. Exponential recruitment in a Hobbesian all-against-all competition creates an unknowable and improbable path to success, while a few touted success stories convey a “you too can succeed” message. Meanwhile, company data on recruit earnings or the lack thereof and the improbable nature of this path are kept from the public.
Second, people lie about the income opportunity and even what the products can do. Recent research by TINA.org showed that 97 percent of companies listed as DSA members in November 2017 “made or are making - either directly or through their distributors - false and unsubstantiated income claims to promote the companies’ business opportunities.” Another study showed of the 62 DSA member companies selling nutritional products 60, “have distributors who are making (or have made) claims that their product can diagnose, treat, cure, prevent, alleviate the symptoms of, and/or reduce the risk of developing a multitude of diseases, which means they are making illegal disease-treatment claims.” Deceptive marketing is not what Adam Smith argued for in defense of competitive markets and is, in fact, against the law.
The industry and its friends defend the Moolenaar amendment and similar legislation with largely unsupported claims. The DSA highlights a code of ethics, in place for many years, shown to be inadequate and ineffective, descriptions of what constitutes an illegal pyramid scheme misrepresent or ignore decades of case law, (here and here), and claims of job creation and community impact via a “steady income” lack data, unless one counts the miniscule percent who operate these schemes and get very, very rich. Investors like Warren Buffett silently acquiesce to the risk of fraud.
Meanwhile, leading consumer advocacy groups, former senior FTC officials and industry critics (here and here) point to the FTC’s successful pyramid scheme prosecution record, consistent case law, and data showing a troubled MLM industry desperately trying to use politics for protection. Dating back to Alexander Hamilton, businesses have expressed their concerns and needs to their government. Unlike major consumer industries, however, the miniscule MLM industry (less than 1% of US retail sales) operates an opaque business model with internal data on participant loses unavailable to the public. The MLM industry does, however, appear to have one thing in common with much larger industries, lots of money to spend.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.