International Heritage Inc. Prototype of Future MLM Prosecutions?
May , 2006
Are pyramid schemes becoming a permanent part of the legitimate marketplace? It would seem so, as the FTC and most state Attorney Generals are currently ignoring pyramid sales scams and not enforcing anti-fraud laws. The multi-level marketing (MLM) industry has poured millions into campaign contributions to purchase this political protection.
But recent prison sentences handed out to former executives of one MLM, International Heritage Inc. (IHI), may offer a glimpse of the future in which MLMs era of scamming will end. IHI and its founder were exposed on a CBS 60 Minutes special after the scheme was shut down. But the IRS and other agencies pursued to perpetrators. Several are now going to jail.
The great harm that pyramid sales scams cause to so many people will ultimately catch up with them. The flaw and the deception in the business model continue to be exposed by whistle blowers and consumer groups. Also, federal court ruling precedents haunt the entire MLM industry.
IHI was one of hottest MLMs in the mid-90s. More than 140,000 people were involved as sales representatives in just one year, many more over the full time span of the scheme. Today its top executives are going to jail and its CEO, Stan Van Etten, is awaiting his own prison sentence. Many other MLM executives could meet a similar fate.
In 1996, federal prosecutors charged that IHI executives cooked the books to record a profit when the business actually lost money. They used that misleading information to recruit investors as the company was going under, prosecutors said.
Apart from misleading its financial investors (IHI tried to become a publicly traded company on the stock exchange), IHI was also exposed in the media for its pyramid sales model. Pyramid Scheme Alert President president, Robert FitzPatrick, was interviewed by correspondent Mike Wallace on the CBS 60 Minutes new show in 1999. He asserted the scheme was not really a sales company since almost no one purchased its goods other than the IHI sales people. The only way the IHI sales people could make money was from recruiting other sales people in an ever-expanding, endless chain.
In such a system, only a tiny few can ever make a profit. The vast majority are doomed to financial losses. IHI deceived MLM recruits with claims that everyone could make money.
According to the Raleigh News and Observer, "In Nov. 2005, Federal prosecutors say IHI was a Raleigh-based Amway-styled business that recruited salespeople to sell high-end goods, such as crystal, jewelry and golf clubs. However, the prosecutors said the company was a pyramid scheme because most of its revenue came from recruiting independent salespeople who were investors rather than selling goods.
"They were selling hope," said Assistant U.S. Attorney J. Gaston B. Williams. "
After IHI went bankrupt and closed under pressure from regulators, Stan Van Etten went on to acquire and publish Success Magazine, the flag ship publication of the MLM industry that featured "success" of MLM promoters.