Update: The proposed law promoted by the Direct Selling Association to protect “MLM” companies from future regulation, criminal prosecution and class action lawsuits was reintroduced in 2017 with changes, though the intent is the same. It is now called HR 3409.
The political landscape concerning pyramid selling schemes has dramatically changed with the election of Donald Trump. The changes include a MLM-connected president and Cabinet who will likely call off the regulators. A recent Slate article documents Trump’s and his Cabinet’s and advisor’s ties to MLM and quotes a pro-MLM financial analyst, “When (Amway’s) Betsy DeVos was named to the Trump Cabinet we took that as a very strong signal that the Trump administration had no real issue with the MLM world. … We are in a post-regulatory world.”
With the election there is now also a stronger possibility for passage of a new national law to protect MLMs, such as Herbalife, Amway, Nuskin and Usana, among hundreds of others. The bill is written and pushed by the MLM-lobbying group, Direct Selling Association. This goes beyond “de-regulation” to “alternative-legality,” a consequence of “alternative facts.”
The bill is HR 5230. If it had passed last year when it was introduced, it is questionable the Federal Trade Commission could have imposed the $200 million refund payment to 350,000 consumers and drastic restructuring on MLM’s flagship, Herbalife. HR5230 promises to sweep away the specter of pyramid scheme prosecution that haunts all MLMs. It does this by changing the distinction of “legitimate MLM”, on which all prosecutions have been based for 40 years. The practices determined by the FTC and federal courts to be “unfair and deceptive”, and which were recently banned in the Herbalife prosecution, would be made legal.
Fraud by Any Other Name
Yet the fundamentals that define pyramid scheme fraud and its inexorable harmful effects have not changed, and never will. For this reason, the controversy, protests, class action lawsuits and short-selling around “multi-level marketing”, aka “MLM,” will not cease, despite the election. The proposed law may restrict regulators, but it will not change the reality on which years of prosecutions are based.
A pyramid scheme is not illegal due to any administration or any special law and it cannot be made legal by enacting a law or by halting law enforcement. A pyramid scheme is illegal because of its inherent deception and the inevitable harm it always must cause. Pyramid schemes are frauds per se. An endless chain proposition that requires payments to participate and in which recruiting new people whose own payments to gain the right to recruit provide the promised “profit” are fraudulent by design. The losses and the intrinsic deception will be the same, law or no law. Fraud is fraud, by any other name.
Though the FTC has been inconsistent in pyramid matters, it has built up a war chest of federal court rulings that are based on a common sense, fact-based recognition of the elements of a pyramid scheme disguised as “direct selling” and “multi-level marketing.” These rulings consistently recognize a categorical distinction between a sales business based on profitable retail sales by individuals in the open market, and a closed, “endless chain” recruitment system in which the participants themselves are the primary buyers and where profit requires both ongoing product purchases to get access to the recruiting profits and perpetually extending the “endless chain.” This is flim-flam, a money trap, financial fraud, a racket, or what is commonly called “pyramid scheme.”
Changing Reality by Changing Words
In accordance with these court rulings, the FTC has referenced a definition of a theoretical “legitimate” MLM (without ever naming one) as “a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors‘ direct and indirect recruits.” (emphasis added)
The problem is that many trusted MLMs have turned out not to be the retail-based sales companies described by the FTC as “legitimate MLM.” They were revealed as pyramid recruiting schemes only disguised as sales businesses. This jarring contradiction was verified in series of recent FTC, SEC and DOJ prosecutions of MLMs, Burnlounge, Fortune High Tech Marketing, Vemma, Zeek Rewards, Telexfree and Herbalife, in which millions of American households had lost billions, in the belief they were “legal MLM.”
Under HR5230, they likely would have been. With a clever insertion of a few key words, the bill eliminates the fundamental distinction applied by the regulators, prohibiting recruiting-based rewards and play-to-play purchase requirements that must lead to losses for the “last ones in”, i.e., the vast majority. Instead of a business being determined legal or illegal based on facts of its operation, the bill shifts the required proof of illegality to a “motive”. Yet, when the whole purpose of a fraud is to deceive the victims, how can the fraud be determined by the “motive” of the people being deceived? MLM pyramids use products to divert victims from seeing that they are paying for the right to recruit others who pay for the right to recruit. They are led to think it’s about “products” even though no one makes any money from personally selling the products.
HR5230 creates a new definition of “pyramid scheme” that cleanses the classic toxic practices of “endless chain”, closed market, payment for rights to recruit and rewards gained from the recruits’ payments – as long as the promised rewards are derived from “purchases”. In other words, if the pyramid money transfer is laundered through product-purchases, everything is suddenly legal. Under HR5230, no longer would the MLM have to generate funds from the external retail market like all other sales businesses do. It could merely re-label the reward-incentivized and quota-driven purchases of participants inside a closed market as “sales.” Those who pay for eligibility to gain recruiting rewards by making “qualifying purchases” and are supposedly “distributors” are now renamed “ultimate users”, just like shoppers in a department store. It’s an alternative reality to provide alternative legality.
The final transformation into legality would be achieved with one key word in the HR5230, “solely”. The government henceforth would have to prove not only that the MLM is designed as a pyramid scheme, which is actually easy to do, but that those who were duped into joining had only one “sole” motive for making purchases – to gain pyramid recruiting rewards. Anything less than “sole”, such as maybe trying the product, or being led to think the product is good, or maybe hoping the product is worth the price as well as providing “unlimited income” — those ambiguous and multiple motives would convert the recruiting-reward-endless-chain plan into innocent “direct selling.” Even if the person purchased “unreasonable” amounts of product, still all is okay unless the government can prove a “sole” motive for the purchases of money-making. Of course, proving a “sole” motive, (especially inside a fraud) is impossible. Hence, an alternative “legality” is established for MLMs.
This proposed law, ironically, is named the “Anti-Pyramid Promotional Scheme Act.” To reveal its true intent and effect, Congress and citizens can just drop the word “anti.”
