The fact that a multi-level marketing company like Mary Kay Cosmetics has been around for more than 55 years does not define whether it is a fraud or scam. Remember Enron (in business more than 15 years prior to the fraud being discovered) and Bernie Madoff (whose investment firm was in business for more than 40 years before his Ponzi scheme was revealed)? Length of time in operation has nothing to do with whether something is a scam or a fraud. Being traded on the New York Stock Exchange is not an indicator of legitimacy either. Read More
Multi-level marketing companies (MLMs) are nothing but pyramid schemes. Oh sure, there are websites that go to great pains to discuss the difference between MLMs and pyramid schemes. But when you boil it down, MLMs are indeed pyramid schemes, and ta class action lawsuit filed against Arbonne International last year explains this well.
First they describe a typical pyramid scheme:
A classic pyramid scheme operates as follows: recruits pay into the scheme for the right to receive compensation from the scheme based, in large part, on bringing new recruits into the scheme. Each recruit’s money is used to pay other recruits in the scheme (particularly more senior recruits), as well as the scheme promoter. The more recruits one brings in, and the closer to the top of the pyramid he is, the more money he might make. Recruits will necessarily lose their money unless they recruit enough new people into the scheme, who will also lose their money unless they recruit enough new people, and so on. Because there is little or no outside money flowing into the scheme from real operations (other than recruitment), because payments from recruits are shared disproportionately with the persons closer to the top of the pyramid, and because the scheme operator takes a healthy cut for himself, the vast majority of recruits are doomed to lose most or all of their investments.
In this one minute video, Tracy explains how Ponzi schemes work. They are also called pyramid schemes because the constant recruitment of new “investors” creates the shape of a pyramid, with many new investors required at the bottom of the pyramid to pay “returns” to the earlier investors.
The hallmarks of a Ponzi scheme include:
- Promises of extraordinary returns (interest) on investment – When it sounds too good to be true, it probably is. Why on earth could you earn so much more on your money with this scheme than with a traditional investment?
- There is no actual investment strategy – You won’t know this, because they’ll make it sound like there is. The promoter will tell you about this revolutionary product or business model or investment that is going to generate all this money. But in reality, there is nothing creating returns. The promoter is only generating “returns” from new investors, and is using your money to pay off other investors and line his own pockets.
- Money from new investors is used to pay returns to earlier investors – Since there is no real business or viable investment strategy, new investors must be recruited to bring money into the scheme. The “returns” paid to earlier investors are often used as “proof” of the viability of the investment strategy when trying to recruit new victims.
- The scheme eventually collapses – It may take a long time, but eventually the pyramid scheme fails when the promoter can’t recruit enough new investors to keep the money flowing.
When Herbalife settled the case brought against it by the FTC, it appeared the company may change how it was doing business. It was said that the company was going to start making truthful claims about earnings. But the most recent earnings disclosure from Herbalife does anything but that.
Until 2017, Herbalife published statements of average gross compensation that covered an entire year. Like all other MLMs, they provided selected information that ended up being misleading in various ways, but ultimately it still showed a pretty dismal picture and showed that few people made much money as a distributor.
But with the 2017 statement, Herbalife made a curious change. An in-depth analysis was written up by Christine Richard at Seeking Alpha. Here is the short story. In a November 2107 conference call, Herbalife president Des Walsh said the company had about 215,000 distributors. In this earnings disclosure statement published in November 2017, Herbalife said: Read More
One of the most upsetting parts of the recruitment into a multi-level marketing company is the false earnings claims. People are lured into these companies with the promises of riches. It is not only done by presenting the tiny fraction of people at the top of the pyramid as typical when they are not. It is also done with outright lies about the level of income that “average” person can expect to make.
The entire business model of MLM is built around lies. Lies about how much you’ll have to work, how you’ll make your money (if you even make any), what you’ll have to do, and how you’ll develop new leads. They lie about how easy the whole thing is, and how you’ll be successful if you’re just willing to put in the time. (The truth is that you’re almost guaranteed to fail.)
Here are some of the most common lies told in the recruiting process:
1. You will be your own boss. You can set your own hours and dictate how you do business. (Not really true. The MLM company tells you how you’re allowed to do business.) You can control how much you make based on how much you’re willing to work. (Not true either. Your earnings are limited by your ability to recruit and the amount of money those recruits are are willing to put in the scheme.) Read More
In October, a billion dollar class action lawsuit was filed against Jeunesse, alleging that the multi-level marketing company (MLM) is actually a pyramid scheme. Truth in Advertising summarizes the lawsuit:
The lawsuit, which was filed Oct. 12 in California federal district court by three current distributors and one former distributor, names 15 defendants and 100 unknown defendants that plaintiffs allege are responsible for the injuries and harm they incurred. Named defendants include Kim Hui, who held the second-highest distributor rank in Jeunesse as a Presidential Diamond director, and her company US Global System (USGS), as well as four Diamond directors in Hui’s downline, May Chang, Yvonne Yen, Samson Li and Lisa Wang.
The lawsuit says Jeunesse Global makes tons of money in Hong Kong and China by exploiting Chinese American distributors, and the company’s “… conduct violates foreign laws and constitutes money laundering and tax evasion.” Truth in Advertising reports:
The complaint most likely implicates violations of foreign law because in 2005, the Chinese government enacted a law called Regulation of Direct Sales and Regulation on Prohibition of Chuanxiao (Chuanxiao roughly translates to MLM). According to this regulation, direct sales are permitted in mainland China but MLMs are not. The suit seeks to hold defendants liable for fraudulent business practices, false advertising, and violations of the Federal Racketeer Influenced and Corrupt Organization Act (RICO) and the Foreign Corrupt Practices Act, among other things.
This lawsuit was the latest in a series of class action lawsuits filed against Jeunesse recently. A July 2016 suit alleged that the company is pyramid scheme and there are secret compensation packages. A December 2016 lawsuit alleged that the company is a pyramid scheme and preys on Chinese American Immigrants. Read More
When someone introduces you to multi-level marketing (MLM), they are likely talking to you about the sales aspect of the company. They are talking about the fabulous product (maybe even about how it “sells itself”) and they are probably downplaying the recruiting aspect (since so many people hate the recruiting concept).
MLMs like to call themselves “direct sales,” another attempt to focus on the selling of the product, even though the companies live and die by recruiting. The product or service being sold is simply the bait to get someone in. It is used as the “cover” for the scam, as a product or service is necessary to combat claims of being a pyramid scheme.
The truth is that people involved in MLM do little actual retailing of products or services to third-party customers (non-members of the scheme). The vast majority of the purchases of products and services are made by the members of the MLMs themselves, either to stock inventory (which they will probably never be able to sell) or for personal consumption.
That’s not retailing. That’s making purchases within the scheme. The members of the mutli-level marketing company likely wouldn’t buy those products or services if they weren’t in the scheme. They’re making purchases for a variety of reasons: to move to the next level, to “qualify” for a commission check, etc.
Back in May, a class action lawsuit was filed against multi-level marketing company WorldVentures. This is the travel MLM that encourages distributors to share photos of themselves holding signs saying “You Should Be Here.” It is marketed as a direct sales travel club, yet the “start a business” part of their website doesn’t even mention what you will be selling or doing. The World Ventures compensation plan mentions making money from selling products and from recruiting others, yet the entire document speaks only to the money that is made from enrolling new distributors (called enrolling new product customers). Making money from selling something seems to be wholly disregarded.
It’s not surprising then, that the lawsuit filed against WorldVentures by Melody Yiru accuses the company of being an endless chain recruitment scheme that is prohibited under California law. The lawsuit says, among other things: Read More
In May 2017, Market America was hit with a class action lawsuit in federal court in California by plaintiffs Chuanjie Yang and Ollie Lan. The lawsuit calls MarketAmerica a pyramid scheme that is taking advantage of Chinese American immigrants.
MarketAmerica is a multi-level marketing company that has a number or product lines including Isotonix supplements, Motives cosmetics, and others. It also uses what it calls a “product brokerage concept,” which is essentially a massive affiliate program which pays a small amount of cash back to the the distributor when purchases are made at certain retailers while on the shop.com website. (This sounds just like Shop to Earn, a defunct MLM that screamed pyramid scheme.)
Per the lawsuit, Market America requires a start-up fee of $399 and an ongoing monthly fee of $129. Distributors must also spend $100 to $300 per month on shop.com to continue to qualify as an enrollee, and other fees are incurred to attend training and events. Read More
Nothing ever changes in multi-level marketing. Even when it looks like the government is taking action against a company like Herbalife, other MLMs continue with business as usual.
Almost everyone loses money in MLM. Which means almost no one makes money in MLM. This is a universal truth. More than 99% of distributors will lose money, and this is GUARANTEED by how these schemes are set-up. No matter how hard you work or how well you follow the guidelines, you still have almost no chance of success.
Six years ago the Salt Lake Tribune published an article about the reality of multi-level marketing. The numbers haven’t changed, and we see the same thing happening no matter the company. Read More