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.
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.
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.)Continue reading
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.Continue reading
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.
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.Continue reading
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.
In the past couple of weeks, multi-level marketing company LuLaRoe (the seller of weirdly patterned leggings) has been hit with two class action lawsuits and a whole bunch of negative publicity. The first LuLaRoe class action lawsuit was filed on October 13 in federal court in California, and the lead plaintiffs are Stella Lemberg, Jeni Laurence, Amandra Bluder, and Carissa Stuckart. The complaint has all kinds of words I like: scheme, bait, lure, and cheating.
The focus of this lawsuit is a promise LuLaRoe made in April 2017. The company said that consultants (who spend upwards of $5,000 to sign up and purchase an initial inventory package) could cancel their agreements and receive a 100% refund of the wholesale value of the inventory they purchased with no exceptions or conditions. Distributors would also get free shipping for the inventory they returned. The policy had no expiration date, but the lawsuit alleges that on September 13, 2017 the company changed the policy to offer a 90% refund (at most) with lots of conditions and exceptions, and no free shipping.Continue reading