In a past appearance on CNBC’s On the Money, Tracy Coenen talked about how consumers could protect themselves from business opportunity scams and multi-level marketing (MLM) schemes. MLMs parade themselves around as business opportunities, but they are nothing more than elaborate pyramid schemes that swindle millions of consumers each year.
And there is another lawsuit against LuLaRoe. The MLM that sells leggings of questionable taste appears on the verge of collapse. A lawsuit filed in 2018 by Providence, a company that supplied LLR with goods first demanded $49 million. More recently, Providence says it is owed $63 million and it wants the court to seize $34 million in assets since owners Mark and DeAnne Stidham are a flight risk. And then the state of Washington sued LLR, alleging it is a pyramid scheme:
“LuLaRoe tricked consumers into buying into its pyramid scheme with deceptive claims of high profits and refunds for unsold merchandise,” Ferguson said in a news release. “Instead, many Washingtonians lost money and were left with piles of unsold merchandise and broken promises from LuLaRoe. It’s time to hold LuLaRoe accountable for its deception.”
The newest lawsuit was filed this month by plaintiffs Tabitha Sperring, Paislie Marchant, and Sally Poston. The lawsuit sums up the scam (coincidentally or not in language that sounds an awful lot like things I’ve written here): Read More
Don’t let your Facebook friends fool you: They’re not making money in the multi-level marketing company they keep pitching to you. And you won’t either. Multi-level marketing is not a business. More than 99% of participants in multi-level marketing (MLM) lose money. Companies like Mary Kay Cosmetics promote the “income opportunity,” but when the vast majority of MLM distributors say they lost money, the story changes to “they didn’t really want to make money,” or “they just did it for fun,” or “they didn’t try hard enough.”
The truth is that MLM is not a “business opportunity.” Almost everyone who participates is guaranteed to lose money. You can follow all the instructions, talk to everyone you know, invest money in the scam, and you will still lose money. Why? Because MLM is nothing but a pyramid scheme in which all the people at the bottom of the pyramid will lose money.
This video was published in 2016, but the information is still very relevant. It features victims of the Herbalife “business opportunity.” They put lots of money, time, and effort into their “businesses” and ended up losers.
The fact remains that all multi-level marketing companies are abusive systems which take money from the participants, offering them the (false) opportunity to earn money, knowing that they are virtually guaranteed to lose money.
Fans of multi-level marketing (MLM) often say that it is just like corporate America! There are levels of employees and managers… Corporate America is a pyramid and MLm is no different. That’s a faulty analysis. When I call MLM a pyramid scheme, I am not calling that because the management structure looks like a pyramid. I am calling it a pyramid scheme because of how it functions.
A pyramid scheme is a pay-to-play scam. People pay to become a part of it, and they pay continually through minimum purchases that are required to remain a qualified member of the scheme. MLM is based on the continuous recruitment of people into the scam using the promise of making money, despite the fact that more than 99% of participants in MLM actually lose money. MLMs sell a fake opportunity. While they appear to be focused on selling products or services, those things are simply a front to make the “opportunity” look like a legitimate business. Sadly, MLM is not a business. Read More
I often hear: “Pyramid schemes are illegal! If XYZ Company was a pyramid scheme, the government would shut them down!”
Yes, pyramid schemes are illegal. No, our government generally doesn’t shut down pyramid schemes masquerading as multi-level marketing.
MLM is a type of pyramid scheme that our government allows to operated. Is it ignorance? Or is it deliberate? I don’t know, but it seems that educating consumers is the best way to fight against pyramid schemes which try to hide the nature of their activity by calling themselves “multilevel marketing” or “network marketing” or “home based businesses.”
Watch this video to learn more.
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