by Robert L. FitzPatrick
In every news article, interview, documentary and all books about MLM (except PONZINOMICS), there will be a statement asserting or conceding that “MLM is legal.” Sometimes MLM is called “perfectly legal” or there will be a statement that “courts have ruled” or “the Federal Trade Commission (FTC) declares” that MLM is legal. With that, any critical fact about MLM or its consequences is reduced to mere complaint.
Tens of millions, effectively 100% of recruits, may “fail” in MLM and lose their money. Tens of thousands are driven into bankruptcy; credit ratings ruined en masse. MLM participants around the world say they were grossly deceived with promises of “income” and “opportunity.” Countless marriages are broken; untold numbers of careers disrupted. MLM commodity products are shown to be bogus, unsellable, dangerous, or absurdly over-priced. Victims attest that they wasted years in MLM-induced delusion. They say MLM stole their money, destroyed family and social trust, and treacherously extracted months or years of free labor from them.
None of it matters… because “MLM is legal.” The legality claim reduces victims to marketplace “losers.” They made “bad choices.” Virtually no one associated with “anti-MLM” dares to openly challenge MLM’s “legal” status. To do so is to contradict the FTC, the US Chamber of Commerce in which MLM’s leaders hold high rank. It means disputing the mainstream media and major academic institutions like Harvard that partnered with the world’s largest MLM. Few will risk confronting these revered authorities or suffer their censure.
The only recourse, “anti-MLM” is told—and accepts—is the improbable task of getting the US Congress to change the law or pass new laws specific to MLM. Some hold hope for a special new “rule” from the FTC that would, somehow, protect the public. It is understood that FTC “rule making” can take decades. Meanwhile, under “current law”, it is said, MLM is “legal” — without specifying exactly which law establishes MLM legality.
Which Law Makes MLM “Legal”?
The MLM legality debate, such as it is, does not ask, “What is this thing called “MLM”, based on how it is designed, how it operates, what its value proposition is to consumers (unlimited income), and the consequences it produces (effective 100% loss rates)?
Instead, the MLM legality forum dutifully and tentatively asks only, “Does a particular MLM violate Section 5 of the FTC Act?” Section 5 of the FTC Act is the “law” on which all the claims that “MLM is legal” rest.
Section 5 of the FTC Act is the briar patch that the wily rabbit begs the vain and gullible fox to throw him into. Even if violation is proven, it is limited to one company, not all that operate identically, and it carries only civil penalty: usually unenforced restrictions, light financial fines, and, possibly cease-orders, that are readily circumvented with new corporate structures and name changes. Top MLM perpetrators dance from one scheme to the next, bringing seasoned recruiters with them. In law enforcement, these are theatrical wrist slaps. For civil society, they are pernicious betrayals.
If it aims to shut down an MLM enterprise, the Section 5 approach seeks to prove that the MLM is a “pyramid scheme” (in the famous case against Herbalife, for example, the FTC did not claim the MLM was a pyramid scheme). The FTC and court rulings have determined pyramid schemes are outlawed under the FTC Act’s broad prohibition in Section 5 against “unfair or deceptive business practices.”
After one judge ruled in one case, in 1979, that the MLM the FTC was prosecuting—Amway—was not a pyramid scheme, as he interpreted Section 5, the FTC adopted the policy that all MLMs are presumed not to be pyramid schemes, but “legitimate direct selling.” All relevant national law enforcement concerning MLM is assigned to the FTC, not the FBI or Department of Justice, establishing the MLM model to be a normal, accepted form of “business.”
Using the “Section 5” legal approach, the regulator or plaintiff bases any case against an MLM first with concurring that “MLM is legal” under Section 5, as the FTC decreed. It then begins to push a large rock up a mountain to prove that the particular MLM in question, out of hundreds of other MLMs that operate under the same business identity and appear identical in design, actions and dire financial consequences to participants, is not legal. It stands apart in the “legitimate MLM industry.” It violates Section 5.
The problem is, the term “pyramid scheme” is not found anywhere in the FTC Act. Section 5 does not refer to “pyramid scheme”, much less define it. There is no federal law of any kind that defines and prohibits “pyramid schemes.”
One identifying hallmark of pyramid schemes is the eventual, inescapable loss by nearly all participants. The loss is pre-determined from the start by the scheme’s design, but often not recognized by the victims until a later time. Though it has been independently verified that virtually 100% of MLM recruits ultimately lose their money in MLM enterprises, the FTC has never linked the enormous and consistent losses to MLM’s design and operation.
The other “pyramid scheme” hallmark can be observed even before losses to recruits are realized. It is that the business proposition is based on the mathematically impossible “endless chain” structure. To gain promised rewards, each investor/participant must recruit others. Funds are continuously transferred from later to earlier participants. This recruiting must continue forever, while the chain’s design places the vast majority of all who ever participate in bottom ranks where “profit” is impossible — making the endless chain inherently deceptive and harmful. So, the rate of loss, if not the scale, can be known from the start.
Though “MLM” is identified and defined by its endless recruiting chain, and the “endless” chain is the basis for MLM’s promise to all of “unlimited” income, the FTC has never acknowledged that the MLM “model”, on its face, is the notorious, inherently deceptive endless chain that will always produce the same massive losses.
The Fog of Deception and Diversion
Court rulings and judicial interpretations of Section 5 have sought to distinguish an MLM accused of being a pyramid scheme by using vague, incomprehensible and immeasurable standards. These standards include: “focus on retailing over recruiting” and “rewards tied to recruiting over retailing.” In the fog of this war of words, the meanings of “retail”, and “focus” are lost in nuances, along with otherwise commonly understood terms such as “end-user” and “wholesale.” Also put into question are the motives and commercial identities of consumers that sign MLM contracts and pay fees that legally define them as “resellers” and “contractors” and place them on the recruiting chain. There is even dispute as to whether the financial losses suffered by recruits, even if universal, constitute “harm” or are just the result of universally poor choices by those consumers in an open commercial market. The argument in defense of the virtual 100% loss rates seems to be that it is possible—and perfectly legal—to fool all the people all the time.
The “F” Word that Dare Not Be Spoken
All the specious contentions around “Section 5” and the endless quibbling over ordinary business terms and standards when applied to MLM obscure and deflect from what is plain and obvious. MLM recruits are victims of Fraud. The MLM “system”, originally called “the business” and invented in the late 1940s, is organized, systemic Fraud, now operating on a global scale.
Unlike the amorphous phrase, “unfair or deceptive business practice,” or the legally undefined “pyramid scheme”, the meaning and understanding of Fraud rest on centuries of classic, common law elements for identification. They include:
- A false representation of a material fact: In MLM, this begins with the universally false claims of an “income opportunity,” and includes all references, images, and testimonies that support such claims, which are all proven false by the virtual 100% loss rate. It also covers withholding disclosure of relevant facts such as cumulative loss and “dropout” rates, the math of a recruiting pyramid that dooms new recruits, and the requisite costs in money and time. Perhaps the plainest of all false representations is that “income” can be achieved from retail selling without recruiting. No profitable retailer has been found. No data exist that verify a “direct selling” (retail-based) income opportunity.
- Knowledge of falsity: MLM top leaders know, with perverse precision, the universal “failure” rates, the average tenure of recruits before quitting under the pain of loss, and the average and total losses recruits suffer. They know, better than anyone, that retailing is not occurring and that profitable retailing is impossible. They personally design the “top loaded” pay formula that transfers most rewards, per transaction, directly to the top, insuring and increasing loss to the largest number of recruits. There is no possibility of unawareness or “honest mistake.”
- Intent to induce reliance: Since MLM’s revenue is directly gained from expenditures of recruits, false statements that induce those expenditures are clearly intended to be believed and relied upon. Intention of perpetrators to induce reliance of recruits on the false claims is further confirmed by the additional false claims—presented as commercial guidance—that “success” can be gained by expending greater time and money on special training courses and programs sold by the MLM. The greatest confirmation that MLM perpetrators intend for recruits to rely on their false statement is the classic MLM tenet that to succeed in MLM, the recruits must ardently believe the MLM’s teachings and promises. Failure and loss, recruits are told, occur only for those who do not believe what they are told by the MLM perpetrators.
- Justifiable reliance resulting in damages: This criterion for fraud is indisputable for MLM. It holds that victims actually do rely on the false claim, leading to their harm and that it is reasonable that they would rely on the false claims.
Would millions sign the lengthy and one-sided MLM contracts, buy overpriced MLM products and recruit their family into the scheme without the false claims of income, opportunity and feasible “direct selling”? Obviously not. No one would except for the utopian claims and promises from the MLM perpetrators.
It is more than reasonable that MLM victims would believe and act on MLM false claims. MLM draws the victims into a closed, controlled and intense persuasion system. So scripted, directed and powerful is this persuasion system that it meets the classic criteria of mind control. MLM perpetrators portray themselves as gurus and role models with great wisdom and moral authority. The entire persuasion system is aimed at inducing harmful behavior, financial, social, personal. The harm ripples through the victims’ social networks where trust and love are manipulated. Tens of millions succumb year by year, resulting in documented losses of extraordinary scale.
Crime, Corruption and Punishment
If the Section 5 approach to MLM were set aside for basing prosecution on the classic standards of Fraud, culpability and restitution could be gained swiftly. The big question for regulators would not be how to prove a “pyramid scheme” but only whether to prosecute the Fraud as civil or criminal. Criminal fraud requires proving guilt “beyond a reasonable doubt.” Penalty can be prison. Civil fraud cases must prove guilt based on “preponderance of evidence”, showing that fraud most likely is occurring. Penalty is usually money paid to victims. It is possible for the government to bring a criminal case and the victims to bring their own civil case against the same company for the same wrongdoing. This is because often the evidence for civil and criminal fraud are essentially the same.
The great obstacle to shifting from Section 5 to Fraud, civil or criminal, is not facts or law. It is corrupt politics. MLM gained immunity (putting it under FTC jurisdiction and applying the Section 5 standard for “pyramid schemes”,) with lobbying (bribery) and propaganda (Big Lie). A change from applying Section 5 interpretations to just proving Fraud requires the FTC to abandon its baseless, politically-dictated policy of treating the MLM model, presumptively, as legal and legitimate. A case using Section 5 means proving that a single MLM is somehow different from all others. It is a false premise. The accused MLM can reasonably argue it has been unfairly and arbitrarily “singled out,” indicating an abuse of government power. It defends itself by showing the obvious — that it operates exactly like all the other MLMs, which the FTC holds to be “legitimate.”
The classic fraud approach looks at facts, data, policies, and behavior common to all MLMs, without presumption that “MLM” is legal or not legal. It does not adopt any special consideration for “MLM.” The inquiry and presentation of evidence includes the inherent fraudulence of the “endless chain” proposition, the verifiably false claim of a retail-based business, and the promise of “extraordinary income opportunity”, as financial data readily reveal to be cruelly false. It applies the standards of fraud to the litany of deceptions and the full range of harms—financial, psychological and social— which would factor in determining penalty and restitution. One case would provide the template for all others.
Finally, as many others have also argued, if the government brought a Criminal Fraud case against just one major MLM, citing the false claims and devastating losses those claims cause, it is likely the MLM “industry” would quickly fold up its tents and go the way of penny-stock boiler rooms, NFT digital art, chain letters, Gifting Schemes, Liar Loans, and Trump University. MLM perpetrators would, of course, find new employment in some other form of fraud, but the 47-year plague of MLM would finally be broken.
