Newsletter with a truckload of embedded links. Can't replace the text with the URLs. So, do sign up for the newsletter at
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International Association to Expose, Study and Prevent Pyramid Schemes
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Pyramid Scheme Alert
Pyramid Scheme Alert is a non-partisan, non-profit, all-volunteer consumer education group.
Contact Robert L. FitzPatrick, Pres. at info@pyramidschemealert.org
Website Update - End of Year 2012
All Previous Update Editions Are Available for Viewing
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Pyramid Schemes and the 2012 Election:
Will Election Results Lead to More Anti-Fraud and Pyramid Scheme Law Enforcement?
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Topping even the 2000 campaign of George W. Bush, the 2012 Romney campaign for US President revealed the extraordinary influence-buying and insider political connections of the multi-level marketing (MLM) industry.
In this election, the news media - and presumably the Democrats too - took notice of MLM's stealth influence and the close ties of candidate Romney to the "pyramid lobby." In the previous elections, the MLM industry poured millions into the G. W. Bush campaign and the Republican Party and, in return, was granted virtual immunity from law enforcement. The MLM business expanded into China with US government help. Millions of consumers were led to believe that "endless chain" income schemes are viable and legal. And, when the economy crashed in 2008, millions more tragically turned to MLM recruiters' false income promise that MLM income was "recession proof." (MLM recruitment boomed during the Recession, producing even more consumer losses.) The media never connected the political/law enforcement dots or followed the money. This time around, however, pyramids in politics were widely reported.
With this year's defeat of the MLM/pyramid standard-bearer, the media exposure of MLM efforts to block regulation, and the election to the Senate of Elizabeth Warren, the organizer of the new Consumer Financial Protection Bureau, the political protection of MLM could end. Pyramid fraud investigations and prosecutions could be renewed as they were in the mid-1990s.
Harper's Magazine: ("Pyramid Insurance") Documented influence-buying by MLMs and its lobbyist, the Direct Selling Association, of state Attorney's General and state legislators. It also showed the close ties to the Romney campaign by MLM companies and the Super Pacs they use to funnel money.
Salon.com: ("Billionaire Romney Donor Uses Threats to Silence Critics") Documented the contributions and high level campaign position of the president of the MLM, Melaleuca, with the Romney campaign.
Mother Jones: ("Mitt Romney's Biggest Backers: Pyramid Schemers?") this famous investigative magazine was the first to report secret multi-million dollar contributions of Nu Skin officials to Romney, connecting also Romney's connections to Nu Skin through the Mormon church and winter Olympics sponsorships.
Whistle-blower: the ex-husband of a Nu Skin founder documented the political lobbying, fund raising, and close ties of top Nu Skin officials to Romney.
Washington Post and Huffington Post: documented secret $2 million donation by Nu Skin executive Steve Lund to Romney, their Mormon connections and past financial ties through the Utah winter Olympics.
Fortune Magazine: documented Money/Mormon ties between Romney and Nu Skin. The article publicized the lavish and profligate lifestyles of Nu Skin's Mormon leaders. The article showed how Nu Skin's stock rise has produced millions in profits for Nu Skin insiders and attracted interest of short-sellers who suspect the income may be ill-gotten.
New York Times: ("For Romney, Ties That Bind") Columnist Joe Nocera detailed the close ties between candidate Romney and the MLM, Nu Skin.
Nocera wrote, "Lund, the third co-founder (of Nu Skin), has donated $3 million to Restore Our Future, the "super-PAC" that is backing Romney. "Mitt Romney is a pretty close friend," Lund told (Fortune Magazine writer) Elkind. "We have been in his house many times. He and Ann had Thanksgiving at our house one year."
Nocera also made the connection between MLM's political/financial influence and the flip-flop by FTC that exempted MLMs from requirements to make financial disclosures to consumers they solicit money from.
Special News: Not yet reported in the mainstream press, Pyramid Scheme Alert has uncovered the extensive advisory role of multi-level marketing consultant and guru, Dr. Lasdwun N. Luzes in the Mitt Romney presidential campaign. Dr. Luzes is a popular speaker at Amway meetings, a lobbyist for the Direct Selling Association and a fervent anti-regulation spokesman.
Between 2001 and 2008, during the George W. Bush administration, Dr. Luzes had extraordinary political influence in Washington. He personally persuaded the United States Federal Trade Commission (FTC) to virtually stop all enforcement of laws against pyramid selling schemes. He pointed out that, even though millions of consumers lose money in MLMs, anti-fraud law enforcement was unnecessary since few people complain publicly.
However, with the election of Barack Obama in 2008, Dr. Luzes' career appeared to have ended in disrepute. According to the Wall Street Journal, it was Dr. Luzes who had persuaded Phil Gramm of Texas, presidential candidate John McCaine's top economic advisor, that Americans who complained about the loss of their jobs were just "whiners" and that the Recession was "only mental."
In this latest election cycle, as a highly paid consultant to Mitt Romney, Dr. Luzes fatefully informed Mr. Romney that 47% of Americans are just "quitters and losers."
Don't Mention the Pyramid Schemes!
FTC Negligence of Pyramid Scams Moves to Denial Stage?
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The stealthy hand of the political lobbyist and the influence-buyer is apparently pushing the United State Federal Trade Commission (FTC) from silently avoiding MLM prosecution to, now, carefully avoiding any mention of pyramid scheme fraud, i.e., denial. In 1984ish fashion, the FTC seems to have adopted a specially crafted language to make pyramid fraud disappear when speaking about "business opportunity fraud." MLMs are, in fact, the most common and most harmful form of such fraud.
The NewSpeak language that covers up the MLM "endless chain" fraud that plagues Main Street was put on display at a Nov. 16 press conference in which the FTC announced a "crackdown" on "business opportunity" frauds. The harms and evils of selling bogus "income opportunities", fake "jobs" and false "work-at-home" schemes - especially during a Recession - were eloquently described by the chief of the FTC Bureau of Consumer Protection, David Vladeck. Also the "tricks" used by "income opportunity" scammers to lure consumers into worthless "business opportunities" were described, minus one trick. That trick is the one that consumers are most likely to encounter and to be fooled by. It is the trick of offering an income based on recruiting of other seekers of the income who do the same. This is the classic "endless chain" trick that can promise "unlimited" income based on "endless" expansion of the chain of "distributors, coaches, IBOs, associates" or whatever pseudo-name is used to describe those who pay to join the income plan. The "endless chain" scams spread virally, reaching far more people more quickly, and they can defraud the public of much more money. They debauch the marketplace by disguising the frauds as legitimate "direct selling." And by claiming the ability to provide the utopian goal of unlimited wealth to followers, they can gain the persuasive and destructive power of cults.
The FTC did not acknowledge this trick or make any reference to the dominant role of pyramid schemes in "business opportunity" fraud because - under pressure from MLM influence-buyers and the MLM industry lobbyist, the Direct Selling Association - the FTC adopted a new rule that specially exempts MLMs from the rule's regulations.
Revealing how absurd such an FTC exemption is, the SEC recently shut down the fastest growing MLM in America, called Zeek Rewards, for operating a pyramid scheme. That one MLM scam pulled in $600 million from more than one-million victims in just 18 months! Yet the FTC has declared MLMs "exempt" from even being required to make disclosures about their "income" claims. During the Nov. 16 press conference, the terms, "pyramid scheme", "endless chain" and "multi-level marketing" were never uttered even once.
Some of the Salespeople Actually Have Customers!
The Legal Relevance of "Retail Sales" to Endless Chain Financial Propositions Is Challenged
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One of the country's top legal experts on MLM, former Asst. Attorney General of Wisconsin, Bruce Craig, has written a provocative article on the widely read forum, Seeking Alpha, that challenges MLM's main legal defense: retail sales (even if the retail sales are undocumented). Bruce Craig successfully prosecuted Amway during his tenure as Asst. AG. He was featured on CBS 60 Minutes. He has continued to examine the legal issues around the multi-level marketing business, and he has alerted the FTC to red flags of pervasive MLM fraud.
In his article, "An Investor's Guide to Identifying Pyramid Schemes," Bruce Craig goes to the core of the case that multi-level marketing employs fraud - the MLM "sales" rely upon a fraudulent "endless chain" income promise. He cites and analyzes the relevant court decisions that clearly outlaw endless chain financial propositions as "inherently" fraudulent. Craig also notes that several state statutes outlaw "endless chain" income propositions regardless of the presence of some retail sales. (See the statutes of NC, WI, CA, ME, VT, and PR)
Bruce Craig points to an obvious fact that goes beyond legal technicalities. It is that whether the MLM "downliners" have some retail customers or not, the endless chain income promise made to the recruiters cannot be fulfilled except to those who get in early. He also addresses the tragic role of the FTC in allowing endless chain "direct selling" schemes to operate with impunity and how that policy has contributed to confusion and harm to the public.
For a further discussion of the inherent fraudulence of the "endless chain" financial propositions made by MLM companies see the following resources:
False Profits Blog: "Have I Got a Deal For You: The Endless Chain Offer"
Comprehensive Look at Legitimacy and Legality of Multi-level Marketing by Jon Taylor, Ph.D.: The Case (For And) Against Multi-Level Marketing
Article by Bruce Craig that Challenges Legality of MLM's that are based on "endess chain" income promises: An Investor's Guide to Identifying Pyramid Schemes
Evidence and Red Flags!
The Need for Renewed Regulation and Law Enforcement of MLM "Business Opportunity" Schemes
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In 2012, there have been several publicized events that indicate pervasive fraud in the multi-level marketing field and call out for a new and comprehensive investigation of this industry by regulators at the FTC, SEC, state Attorneys General and the new Consumer Financial Protection Bureau (CFPB):
In September , the MLM diet company Medifast (MED), agreed to pay $3.5 million to settle FTC charges of false product claims. These fines are for violating an earlier order to cease and desist from making unsupported weight loss claims. Despite its promotional use of references to doctors and "clients", most of this company's revenue is gained from ordinary low calorie packaged food sold by non-medical sales representatives in a multi-level marketing scheme. The MLM, Nu Skin, has also been previously served with a FTC cease and desist order for making false weight loss claims.
In August, the fastest growing MLM in the country was prosecuted and shit down by the SEC for fraud. Zeek Rewards was charged with running a pyramid scheme. Showing the power and reach of such MLM frauds, in just 18 months, Zeek enrolled one million consumer investors, taking in $600 million in revenue. For months, the internet buzzed with exciting testimonials of participants about high income gained in the Zeek MLM. Adding to its appeal, the attorney who provided "compliance training" to Zeek's doomed consumer investors is a prominent member of the Direct Selling Association and a recipient of a DSA award for aiding MLM companies in avoiding or escaping prosecution by the FTC, SEC and state attorneys general.
Add to those events...
The MLM, Visalus Sciences, that also sells diet products and is a subsidiary of the MLM, Blyth Industry (BTH), suddenly began to show 500% growth, caused largely by a massive recruitment drive based on promises of income and that drew thousands of income-seeking consumers from other MLM companies. Leveraging its extraordinary revenue growth, Blyth announced a $175 million stock offering to the public (IPO). Prominent and respected business news media figures raised red flag warnings about this investment offering, noting that "In its simplest form, ViSalus is in the business of selling product to distributors." Blyth then abruptly and inexplicably, withdrew the stock offer. Blyth Industry stock plunged 20% in one day. In the following quarter, sales, recruiting and revenue of Visalus declined.
Last May, hedge fund manager David Einhorn famously asked a few seemingly innocuous questions about Herbalife's (HLF) business model during an investor call, and a $2 billion equity flight ensued over night. The damage extended beyond Herbalife to Nu Skin (NUS) and to a lesser extent Usana (USNA). This equity flight was reportedly based upon investor concerns of possible illegal practices, based on unsustainable recruiting of consumer/investors and deceptive income claims.
More events related to questions and claims about MLM fraud...
In 2011, a Belgian court ruled that Herbalife (HLF), one of the oldest and largest MLM companies based in the USA, is an illegal pyramid scheme.
In 2012, Amway, considered the prototypical model of all other multi-level marketing companies, agreed to pay up to $150 million in refunds and restitution in a pyramid scheme class action lawsuit brought by distributors.
In 2007, the UK government sued Amway and sought to close the company in that country, due to the government data showing that 99% of all UK residents in Amway had never earned a profit in 30 years.
The August, 2008 pyramid scheme prosecution of the publicly traded MLM, Your Travel Biz.com (YTBLA), by the California Attorney General destroyed YTB's shareholder value. YTB had grown to the 7th largest travel agency in the country. Your Travel Biz.com was a member of the Direct Selling Association, which gave the MLM's business model and practices its seal of approval under the "code of ethics".
This year, a lawsuit and other efforts by a founder of Nu Skin (NUS) to stop publication of a whistle-blower book were halted by a Utah court that ruled that the writer is free to publicly claim that Nu Skin is a "pyramid scheme." The filing of SLAPP lawsuits by MLM companies against consumers, writers and analysts that call their legitimacy into question is becoming a common pattern.
A 2012 report by Citron Research asserted that Nu Skin is using the multi-tiered MLM pay plan in China where it is banned and risks losing its license in China, placing billions of investor dollars at risk. Citron also wrote an open letter to the FDA asking the FDA to look at Nu Skin's product that Nu Skin claims "reset youth gene clusters."
The new convert to MLM, Avon, is under investigation in China on bribery charges and violations of the Foreign Corrupt Practices Act. Avon modified its business plan in 2005 to increase MLM incentives for is salespeople to recruit more salespeople.
NPR and other media are questioning the legitimacy of the "business opportunity" sold by multi-level marketer, Mary Kay. The examination was prompted by a 2012 Harper's Magazine cover story featured the MLM, Mary Kay. in which the author went undercover as a MK sales rep. She characterized MK as a "pink pyramid scheme" that is basing its revenues on pushing inventory on newly recruited salespeople.
The Main Street Bubble: By promising high income to millions of people based on money they would get from future investors, MLM artificially inflates consumer investments and the value of the companies. Without enough future investors, the individual consumer's investment in MLM "distributorships" is virtually worthless. If the individual investor doesn't recruit enough new investors, the bubble collapses - for the individuals. If the scheme can replace the "losers", it can re-inflate and repeat the cycle, month after month.
Hedge funds and even rich and famous individuals have become involved in MLMs that were prosecuted by government authorities. The wife of ex-CEO of Bank of America became a prominent recruiter of the MLM, Fortune High Tech Marketing. This company was prosecuted by regulators in several states. Donald Trump has hyped the MLM, ACN, that was also charged with pyramiding by one state as well as in Canada.
Newsletter/Conference Looks at MLM as a "Financial Product"
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TJ Strategies, a higher education and consumer finance policy newsletter that is read widely by investors, advocates, and policymakers, recently hosted a roundtable discussion that included discussion of possible new scrutiny of the multi-level marketing industry.
The event was the semiannual "Higher Education and Consumer Finance Policy Conference", held November 15 in Washington, DC. In the afternoon session entitled, "The Outlook for Consumer Protection Policy" a panel of experts and analysts discussed, among other subjects, the potential of multi-level marketing being regulated by the new Consumer Financial Protection Bureau (CFPB) for selling a "financial product", i.e., work-at-home "distributorships."
Boston-based attorney Douglas Brooks participated as an invited member of the panel. He is a nationally recognized expert on multi-level marketing, franchises and "business opportunity" offerings. Douglas Brooks brought successful class action lawsuits against the multi-level marketing companies, Herbalife and Nu Skin, winning millions of dollars in restitution for victims who invested as "distributors."
Others invited to participate on the panel included, Jonah Crane, the Financial Services Aide to Senator Chuck Schumer; Matthew Lapinski, from the law firm, SNR Denton; Ed Mierzwinski, Federal Consumer Program Director and Senior Fellow, U.S. PIRG; and a Staffer from the Office of Senator Elect Elizabeth Warren.
The Washington, DC panel of government leaders, policy analysts and news media marks a growing new interest in regulation of multi-level marketing and the negative economic impact of MLM companies on consumers. More information is available from the conference host, T. J. Strategies.
Donations Make It Possible
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Pyramid Scheme Alert is all-volunteer and non-profit, but it still has many costs to maintain its website, to help with legal defense, publicize its research and analysis and to assist thousands of individuals worldwide. PSA's costs are covered by contributions from courageous private citizens. You can support PSA's work by making a donation.
Special Reports for Consumers...
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Click on the image to receive "What About This One?"
What About This One? Now Available! Free! The new audio and written report published by Pyramid Scheme Alert is the product of years of research and direct experience of analysts, former insiders of multi-level marketing companies and veterans of direct selling.The audio is a down-to-earth, conversational dialogue. that hits the key points for evaluating income opportunities and avoiding pyramid scams. The companion written report outlines the information for easy reference.
The Main Street Bubble: (free) The financial bubble is composed of in
To receive a copy, click on the logo and insert "Main Street Bubble" in the subject line.
vestments by millions of Main Street people in MLM "business opportunities" that depend, for their worth, on bringing in new investors. As millions "fail" each year, their individual bubbles collapse. But as millions of other new hopefuls take their places in the schemes, the MLM bubble is re-inflated, year after year. The Main Street Bubble report details how the FTC has become corrupted by close ties to the MLM industry, with key FTC leaders working as MLM lobbyists and "experts."
False Profits Blog: Discussion of the Economics, Politics, Legalities, Ethics and Sociology of Pyramid Schemes and multi-level marketing. The False Profits Blog, published by author, Robert FitzPatrick, is a sane, rational and fact-based forum. Read, get podcasts, make comments, subscribe.
Contact Information
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Pyramid Scheme Alert
Tel: 704-334-2047
Fax: 888-334-1944
Email: info [bat] pyramidschemealert.org
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Pyramid Scheme Alert.org | 1800 Camden Rd. Ste. 107, #101 | Charlotte | NC | 28203
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