Some state regulators are doing what the Federal Trade Commission (FTC) will not do – protect the public from pyramid selling scams, also called “business opportunity frauds.”

The latest example is the scheme, Your Travel, a classic pyramid in which consumers buy the right to become “travel agents” and then make money when they recruit other “agents.” California Attorney General, Jerry Brown, has struck a fatal blow against the scheme and provided a great benefit to hundreds of thousands of consumers.

Each YTB agent has the right to sell travel services, but few do or could. They are not trained, have no experience and nobody knows who they are. In short, the role of “agent,” like other MLM disguises of IBO, Mogul, Supervisor, Coach, Associate, etc., is a ruse. The real business is the classic Ponzi recruitment scheme, and such a plan guarantees that the vast majority must always lose.

The California Attorney General sued YTB in August of 2008, calling the company a “gigantic pyramid scheme”. Now it has settled with the company. The result will likely lead to the company’s ceasing operations. Consumers also filed a $100 million class action lawsuit against YTB, charging that it operates fraudulently.

Yet, during all of this, the FTC, which oversees multi-level marketing schemes, never even initiated an investigation. One obvious reason is the insider lobbying of the Direct Selling Association (DSA), of which YTB is a member. The DSA has sought to legalize exactly what the California AG sued YTB for – running a “closed market swindle,” that is, MLMs that have little retail revenue and depend on “endless chain” recruiting. YTB was admitted as a member of DSA in 2007.

According to DSA, YTB went through a “rigorous approval process” to ensure that it met the DSA “code of ethics.” In light of DSA’s lobbying work to legalize “closed market” schemes (such as YTB with little retailing and the majority are doomed to losses), and since YTB passed the “rigorous approval process”, YTB’s practices appear to be condoned by the DSA.

According to the California AG press release, the settlement includes “Significantly limiting how much people can make from individuals they have recruited and who have become recruiters themselves. Sixty percent of recruiters’ sales must come from persons who are not themselves recruiters;”

This requirement goes to the heart of the classic MLM fraud which is perpetrated by many other MLM companies. Most MLMs have little external revenue. Each MLM person’s income depends on recruiting a large number of new people into the MLM scheme. Without a “downline,” the consumer is doomed to financial losses and “failure” in the MLM. Retail selling is impractical and unprofitable and almost no MLMers do it. The products are usually hopelessly overpriced, unknown, and similar products are available more conveniently in stores or online. MLM pay plans reward recruiting far more than retailing. Indeed some pay so little on retail margins, it makes no sense for anyone to even try to retail, even though they are supposed to be “direct sellers.”

There’s a big problem with everyone having to build a “downline”. Basic math and the limits of the real world require that only a very small number can ever have a large downline. Someone has to be at the bottom. When the numbers are crunched, the great majority will ALWAYS be in the bottom. So, claims about a viable “income opportunity” for everyone are cruel lies. MLMs are merely schemes in which Peter (the majority at the bottom) is robbed to pay Paul (the schemers at the top).

The MLM recruitment plan is closely analogous to Bernard Madoff’s $50 billion scam. In that fraud, he paid earlier investors with money from later ones. He claimed he generated profits from stock trading but was really just transferring investment funds. The lack of retail income in a MLM scheme is equivalent to the lack of profits from trades in Madoff’s. Both schemes are closed, putting all investors who join at the end (the great majority) in a doomed position.

The California AG has hit YTB hard, possibly leading to its bankruptcy. Even worse for YTB, according to news reports, the Illinois AG has also taken legal action against the scheme. According to the report, “Attorney General Spokesperson Natalie Bauer says investors complained the only way they made money was by encouraging other people to purchase websites.” (that, is to make money, each “agent” must recruit new “agents,” who must do the same, etc.).

For those not involved in YTB but perhaps have experiences with some other MLMs, these events should be noted carefully. The question for allMLMs is “Where does the money come from?” If it is mostly coming out of the pockets of other recruits, you are in a fraud! If most people are not making a profit from retailing, but rather are recruiting others to join the scheme, this is not “direct selling.” It is Ponzi recruiting. You are in a fraud.

The MLM industry has been well protected in the last 8 years by its lobbying. However, that era may be over. Recruitment scams, like YTB, dominate the multi-level marketing industry and the membership of the Direct Selling Association. Their days of protection, like Enron’s, Bernard Madoff’s and the sub-prime lenders’, may be finished. Common sense, reasonable consumer protection, and law enforcement may return.