For all the news coverage, including a hilarious Samantha Bee commentary, interviews of tearful and angry victims, torrents of social media debate, and an upcoming film documentary, the state prosecution of the MLM, LuLaRoe, ended not with a bang for justice but a bureaucratic whimper. It was a mini-repeat of the FTC Herbalife prosecution, an insignificant cash refund, the company admits no wrongdoing, no one criminally charged. Déjà vu.
Under “settlement” terms, LuLaRoe “agreed” not to run a pyramid scheme (as if operating a pyramid scheme were otherwise permitted ) and pay recruiting rewards only based on “retail” sales, that malleable, elusive and meaningless status in MLM transactions. Other requirements involve publishing a risk disclosure document (as if concealing risk in a financial scheme that is sold to thousands were otherwise permitted).
What Dare Not Be Said
The elephant in the room – the factor behind LuLaRoe’s revenue explosion to billions in 5 years, the mania over its ordinary clothing products, and the heart-breaking losses for hundreds of thousands who staked time, money and relationships on the scheme’s financial promises – was never addressed. Washington state regulators dared not to speak of it. MLM’s political influence held fast. It was all quite predictable.
Washington state had never enforced its statute against “pyramid promotional schemes.” In fact, the wording of the law had been “reformed” in 2006 under the watchful eye of the Direct Selling Association, adding and deleting clauses to generally exempt MLMs. The case dragged on several years. No other state AGs signed on. It ended with an agreement that “does not constitute evidence or an admission regarding the existence or non-existence of any issue, fact, or violation of any law.” An onlooker, might reasonably ask, “What was the point, really?”
The prosecution ended with an agreement that “does not constitute evidence or an admission regarding the existence or non-existence of any issue, fact, or violation of any law.”
What was never addressed was the factor that misled perhaps as many as 300,000 households in America to sign LuLaRoe contracts, leading to loss, confusion, and outrage, the classic endless chain proposition. Like all MLMs, LuLaRoe sells a financial perpetual-motion machine, a non-returnable, intangible substance, said to be “unlimited” in quantity.
The “infinite”, immeasurable and incomprehensible product that hundreds of thousands of people paid thousands of dollars each to acquire is the LuLaRoe “distributorship.” The “distributorship” costs the company nothing to produce and takes up no shelf space. Though LuLaRoe charged thousands of dollars for the “distributorship”, including inventory, data and history show that it has no inherent commercial value. Even the inventory was shown to have been worth little or nothing – unsellable – for the majority of buyers. However, the distributorship can become valuable to the buyer, after purchase, if the buyer subsequently induces others to buy it also, who in turn must do the same to infuse their “distributorship” with value.
Endless Chain Proposition Permitted
Business law normally requires evidence that a real product is delivered and of value approximately equivalent to the money paid and under terms made available and agreeable to the buyer (Even churches do not “sell” infinite grace and eternal salvation). Business transactions must be measurable to determine value and validate contracts. When the contract is incomprehensible or deceptive, and when the product is not delivered, cannot be measured, or does not exist at all, the transaction is no longer called “business”. It is described as fraud, except when the product is called an “MLM income opportunity.”
An “endless chain” financial proposition – robbing Peter to pay Paul – cannot be sustained and always places the majority at the dead bottom of the chain where profit is impossible. Those that join the chain inevitably lose time, money, and a piece of their lives too. That is why chain letters, pyramid schemes and Ponzi schemes are regarded as frauds.
Nevertheless, LuLaRoe and all other MLMs openly sell, for advertised price, mystical, unlimited, immeasurable entities, based on an endless recruiting chain. They are called “MLM distributorships,” which they promote – like salvation or a state of grace – as the “opportunity of a lifetime.”
None of these realities were addressed in the Washington state settlement. LuLaRoe will continue with its same endless chain structure and the same pay formula that transferred 79% of all “bonus” rewards to the top 4% of the “sales” force each year. Over a longer period of time the perverse transfer becomes even more extreme as the base of losers increases with churning, while the few in the top levels of recruiters remain the same.
“Retail” Pretense Maintained
The settlement maintained the pretense that LuLaRoe is a “retail” sales company even though data in the settlement show that at least 3 out of 4 participants did not gain any “retail profit.” The true percentage of “retail” losers is much higher when expenses and opportunity costs are factored. The feasibility of running a longer term, sustainable, retail-based LuLaRoe distributorship – without recruiting others into the scheme – was not even mentioned in the settlement.
Is it even possible to profitably do retail sales for a company that sells “unlimited” numbers of “distributorships” as LuLaRoe is allowed to do under the settlement terms? What value could there be in something that has no limit in quantity? There are 2.9 million households in Washington. The Washington state AG states that “more than” 3,600 people in his state joined LuLaRoe since Jan. 2014. More than one out of every 800 households already signed up as LuLaRoe distributors! How many “distributors” can the state absorb that would allow profitable retailing? How many households does a distributor need on average for profitable retailing? How many households are viable prospects?
Cynically and disingenuously, the settlement did not acknowledge the obvious reality that endless-chain recruiting had long ago destroyed any profitable retail selling opportunity for LuLaRoe “distributors.” It did not acknowledge that whatever retailing does occur is unfairly fueled by the mania of the false income promises to resellers, based on “unlimited” income promises. The settlement lets LuLaRoe keep right on recruiting ad infinitum and keep on selling its “unlimited opportunity.”
Despite the verified losses and the failure of nearly all to engage in profitable retailing, the state AG maintained the politically-required pretense that the LuLaRoe “distributorship” is not a prop for a pyramid money transfer and that “retail” selling is the foundation of “MLM” Why? If the state had addressed these fundamental factors in the LuLaRoe case, it would likely be asked about all the other MLMs in the state running exactly the same con.
