When pyramid schemes ignite on Main Streets anywhere in the world, the ensuing manias have been compared to a wildfire, a stampede, a mob-like madness. The rallying cries of “get in now, ground-floor opportunity, unlimited income!” are spread virus-like in neighborhoods, churches and offices.
The pyramid epidemic is a phenomenon not unlike frantic selling and buying on Wall Street trading floors during wild periods of bubble expansion. The similarity between Main Street pyramid manias and Wall Street buying frenzies is not superficial. The two share fundamental characteristics, and, today, the madhouse world of stock speculation and the hysteria of pyramid scheme zealotry are merging. Wall Street has discovered Main Street’s pyramid selling schemes and how much money there is to be made kiting up pyramid scheme stocks. Trading pyramid stocks can offer larger profit than selling pyramid snake oil products and manipulating dreams of “unlimited income.”
MLM stocks are soaring, making millions for some speculators who have nothing to do with running the MLM schemes themselves, though the MLM insiders are making out like bandits too. At the start of August, 2013, Nuskin is up 64% from a year ago, Mannatech up 120%, Herbalife (after suffering an earlier decline) +19% and Usana is up 84%. Some of these stocks have risen and dropped sharply during shorter time frames, giving speculators even greater short term profit opportunities. MLM stocks are hot!
Pyramid Selling and Stock Bubbles
Why are these stocks rising? For the same reason that MLMs themselves are growing — constant enrollment of new investors. The MLM stock surge is its own form of an “endless chain.” Large investors are buying the stocks, driving up the price. As they buy and profit, the belief spreads on Wall Street, just as MLM fables of “unlimited income” do on Main Street, that the stock price will go higher, without limit. At the bottom of the stock buying chain, smaller investors join the frenzy, following the lead of the Wall Street “upline” in mirror image of the millions of consumers buying MLM distributorships in the belief that millions more follow them, ad infinitum.
Meanwhile, in China, the newest and largest market for pyramid selling schemes, riots break out when authorities try to stop some of the fast-spreading Main Street pyramids depicted, as they always are in the USA, as “home-based businesses.” It now appears that the biggest USA-based MLMs, Amway and Nuskin, are being allowed to foist their “endless chain” income promises on Chinese citizens, despite strict laws in China against such deception. Some of the pyramid money inevitably seeps into the political realm, into universities, and the media in China, as it has in the USA. Critics are quashed or isolated. Official inquiry does not occur. Tales of riches for all spread on the streets, and the government regulators fall strangely silent.
In the USA, national radio Talk Shows tout extraordinary “income-at-home” opportunities linked to unnamed “Fortune 500 Companies listed on the NY Stock Exchange.” The reports of these miracle businesses are seldom examined in the news media that fear lawsuits from MLM schemes if they even infer that a “direct selling” company is a pyramid recruitment scam. Consumer whistle-blowers are attacked with SLAPP lawsuits and vilified by MLM-sponsored blogs.
Some whistle-blowers even fear for their physical safety. When one expert of the Federal Trade Commission attended a trial to testify and explain why an MLM was a fraud, he had to be assigned body guards. Such is the force of denial and delusion among pyramid adherents that they may resort to personal violence to suppress or to avoid the truth. I myself was assigned body guards in Sri Lanka when I delivered a presentation exposing the notorious MLM pyramid scheme, GoldQuest, that has ravaged parts of Asia and the Middle East.
When millions of the public can be so manipulated as to invest hard earned money in schemes in which 99% lose, and some will resort to violence to defend the very same schemes that defraud them — and the government does nothing about it — you could safely predict that America’s craftiest financial traders would see a bonanza opportunity. It is said that war is the greatest of all businesses for traders and speculators, but pyramid schemes must surely be a close second.
In recent years, the “business” pyramids amassed such wealth that about a dozen multi-level marketing companies got listed on stock exchanges. After several decades of operating at the margins of the financial world, MLM’s potential for exciting irrational investments on a massive scale recently gained the attention of three of Wall Street’s most predatory figures, Donald Trump, Carl Icahn and George Soros – respectively, a flamboyant braggart, real estate speculator and pied piper of wealth; a ruthless corporate raider; and a currency manipulator, according to their popular reputations.
These three have recently put their money behind expanding and exploiting the speculative financial opportunity that unregulated MLMs pose. Trump has become a public face of MLM, hyping the MLM scheme, ACN, as well as starting up (buying and renaming an existing MLM scheme) and soon selling his own MLM company, called Trump Network. Corporate raider, Icahn, and Soros, who is notorious for currency destabilization (that harms millions of people by insidiously devaluing their paychecks and savings ), are now among the largest backers of the MLM, Herbalife. When another Wall Street hedge fund sought to profit by exposing Herbalife’s plunder especially of vulnerable Latino consumers, Icahn and Soros spotted a unique opportunity in that brief stock price drop brought on by the negative press. Buying up huge blocks of Herbalife shares, Icahn and then Soros have bolstered and raised Herbalife’s share price and attracted other investors who followed their lead, raising prices even higher.
Derailing a Freight Train
The one large financier who sought to profit from MLM’s extraordinary spread on Main Street in a different way, by profiting from one of the pyramid’s – Herbalife’s – collapse, is William Ackman of Pershing Square. Ackman’s position did not seek to stop the damage of pyramid power on Main Street. It only sought to derail it by focusing on just one large pyramid, Herbalife.
Profit for the “short” financiers, such as William Ackman, requires activist effort to expose true facts about the pyramid — its deceptive income claims, the enormous financial harm it causes, the fatal flaw of its “endless chain” structure, and its violation of anti-fraud laws. The short position must not only combat the “irrational exuberance” and freight train momentum of the pyramid expansion but may also involve getting government regulators to take action. For decades in the USA, the government has done next to nothing to stop pyramid fraud on Main Street. Getting the regulators such as the Federal Trade Commission (FTC) to take action on behalf of the public is a formidable challenge. Some ex-officials of the FTC became lobbyists for the MLM industry.
The “short” investors in multi-level marketing like Ackman share with the Pyramid Profiteers, Icahn, Soros and Trump, the goal of making money, but the resemblance ends there. One seeks profit from exposing true facts, the others by bolstering deception. One seeks to end the social and financial harm of the pyramid, the others to increase the damage. One does a civic service while making money. History can only pass full judgment on the ones that pretend to ignore and to profit from widespread losses on Main Street.
The activist financier that seeks to expose a pyramid scheme, must also battle the sacred pronouncements of Wall Street analysts and economists. Like priests of old whose job it was to argue and explain to the common people that it was God’s will for marauding armies to conquer and steal from them, today’s Wall Street analysts must find justice and goodness in financial profit and growth, no matter how it is gained.
While they run, pyramid selling schemes are financial works of wonder, miracles of the marketplace. They are profit machines like the business world has never seen. Wall Street “analysts” and most business writers, therefore, fall all over themselves to praise the business, exalt the leaders, and explain away the fundamental flaws, the lies and the losses to consumer investors, thus adding to the schemes’ attractiveness to more investors and kiting the stock prices higher. Those activists investors who hope to expose the truth must overcome volumes of dis-information, babbling rationalizations and disingenuous hype from supposed “authorities.”
Today’s financial clerics diligently explain away or assign to the mysteries of the marketplace the inexplicable performance of the pyramids. Among the financial anomalies for the analysts to rationalize:
- Pyramids that sell commodity goods may grow by 100% during the worst times of Recessions. The analysts must explain how it is that supply and demand laws don’t apply, and economic cycles are irrelevant to the pyramid companies.
- Why pyramid scheme businesses have little need for costly advertising and marketing; how it is they don’t need to develop a consumer “brand” while selling to millions of people?
- The bizarre reality that pyramid “customers” appear to all be the companies’ own “distributors” and true end-users cannot be counted or identified.
- How it is that millions become “distributors” yet the pyramid companies claim few of them have any interest at all in selling the products or making money from their “distributorships”?
- How it is that pyramids, like Herbalife, can charge double and triple the price for their commodity products compared to other conventional companies selling similar goods. Competitive pricing, seemingly does not affect them?
- How can pyramid companies command 80% gross profit on “wholesale” pricing to their “distributors,” most of whom never resell the goods?
- Why pyramid companies have so few repeat customers, and are therefore relieved of any need for customer service costs?
- Why 50-80% of all the distributors quit the business within a year and never come back and never buy the company’s products again after quitting?
- How it is that millions of “failed” distributors generally do not tell others about their losses and they almost never complain to authorities?
- How they motivate salespeople when most of the commissions are transferred to the top of an enormous recruiting chain, with top levels receiving more on each sale than those get who actually do the selling?
The troubling truth that the Wall Street analysts do not dare to examine or openly discuss is that the pyramid business does not operate under the same economic rules and laws that apply to conventional, legal companies. For this reason, traditional economic analysis has limited use. It cannot make a valid competitive analyses, account for market share or measure customer preferences. Indeed, Herbalife claims it does not know, or care, who its end-user customers are!
In reality, pyramid businesses only appear to participate in the larger, legitimate marketplace, such as the diet food market of Herbalife’s products. In truth, pyramids such as Herbalife, are micro-economies, distinct from the real economy. They have their own rules, laws, and trends. For this reason they remain unstudied, willfully ignored by economists, who must genuflect to all forms for profit-making. Direct inquiry would reveal that pyramids are a form of illegal, underworld business, operating in plain sight, run by respectable looking people and unmolested by law enforcement, like gangs in a neighborhood. Some have actually called MLMs “adult gangs.” Members prey upon their local communities with illicit business (fraud), maintain secrecy of their operations, recruit the young and vulnerable, pay authorities for protection. Their ruthless authoritarian leaders demand total loyalty.
As businesses, multi-level marketing schemes boldly refuse to make meaningful disclosures to consumers or government, which normal business must make. Their operations are unmonitored and unregulated. The “multi-level marketing” type of pyramid claims to be a “business model” distinct from all others, yet the federal government has never officially defined it, classified it or developed any rules to ensure against fraud in its ranks, as it does, for example with franchising. In perhaps the most naked illustration of the pyramid industry’s back room political power, the FTC specifically exempted multi-level marketing from newly adopted disclosure rules related to the sale of “business opportunities” to unsophisticated consumers. They made this exemption even though the sale of a business opportunity is the defining hallmark of multi-level marking. Multi-level marketing is, in fact, the mother of all “business solicitations,” the one type that most people do encounter in their daily lives.
Pyramid Persuasion, Beyond Madison Avenue
If the macro-numbers of growth and profit in pyramid schemes were not enough, the shrewd operators, Trump, Icahn and Soros, might have also taken notice that pyramid schemes have a unique power to dominate, control and manipulate people’s minds. The power of the pyramid to captivate the mind — a form of brain-washing — surely surpasses the influence of Madison Avenue’s advertising, and at a tiny fraction of the cost. Pyramid schemes’ utopian promises not only cause mass mania or even violence, they also transform individuals’ personalities, and in the process destroy or divide families, marriages and ruin careers. This is the well known cult-phenomenon that millions of families and friends of multi-level marketing recruits have reported. The pyramid recruit abandons friends and family, constantly repeats the scheme’s utopian rhetoric about wealth and success, and loses interest in all other endeavors except the pyramid’s. Some pyramid followers who have dedicated themselves totally to the pyramid leaders’ lies and later discovered the truth have tragically taken their own lives rather than reconcile their folly.Pyramid recruitment events rival, in utopian fervor, fundamentalist rapture meetings or the frightening conventions of political extremists. Ego-maniacal leaders strut around on the stage like financial dictators demanding loyalty, castigating those who are not “successful,” and mocking or attacking questioners and critics as ignorant or mal-intentioned. This kind of Main Street madness used to be confined to religious fanaticism, sports mania or political extremism. Today, in the disguise of “home based business” and “direct selling,” also called “multi-level marketing” it has taken residence in the formal economy. It is now an “industry,” the perfect environment for profiteers like Icahn, Soros and Trump to manipulate.
Stealing the American Dream
Imbedded in the business community, and falsely claiming to offer all investors their greatest chance to achieve financial freedom, a life of leisure and personal fulfillment, the pyramid “business” has taken up the banner of the American Dream. It has hijacked the highest ideal of America, the pursuit of happiness. Tragically, as the traditional pathways to prosperity — higher education, steady jobs, home ownership, corporate ladders — have declined in reliability, the false claims of the pyramid scheme have gained in the popular imagination. Millions now view the MLM scheme as their last best hope to achieve the American Dream, just as the MLM promoters tell them it is.
In 2008, the USA and other parts of the world experienced the tragic outcome of another Wall Street/Main Street merger. The largest banks and financial organizations in America realized that the hopes and dreams of homeownership could be ultra-commercialized by issuing “no-doc” mortgages on overpriced housing to an unsuspecting Main Street, and then selling the “toxic assets” based on the those mortgages and homes to a hungry and uncritical Wall Street. The result was devastation of the savings of the middle class in lost home values and life savings, high cost mortgages, foreclosures, and massive unemployment. The smallest of Wall Street investors — the last ones in — were similarly wiped out.
That merger may serve as a template for the motives, tactics and consequences of the current merger of Main Street Pyramids, e.g., Herbalife, with Wall Street Stock Speculators, e.g., Soros, Icahn and Trump.