Multi-level marketing companies (MLMs) like to refer to themselves as “Direct Sales” companies, because this puts the focus on the sale of the product or service, and takes focus off the business of recruiting.

I’ve been researching MLMs for years, and I’ve found that companies use the product or services simply as bait and a cover. It is “bait” for recruiting because it looks legitimate to a potential recruit. (How many people would join MLMs if they were truthful and told you that what you really had to do was constantly recruit new people?)

It is a “cover,” since it is what makes the schemes legal under state and federal laws. Pyramid schemes (which are simply a transfer of money up a pyramid-like structure) are illegal. But if you use a legitimate product or service as your cover and your reason for transferring money up the pyramid, you can successfully claim that your company is not a pyramid scheme. Again, the product or service takes the focus off recruiting.

Are people really making money from all this recruiting of FHTM Independent Representatives? The vast majority aren’t.

An income disclosure statement for Fortune Hi Tech Marketing from January 2010 shows exactly how dismal the financial results are for its representatives:

• 54% of representatives who qualified for commissions got an average of $93 per month
• 41% of representatives who qualified for commissions got an average of $256 per month

These figure are before all business expenses. Those who have been involved with multi-level marketing know that there are plenty of expenses, including fees for meetings, travel expenses, promotional materials, sign-up fees, renewal fees, and marketing costs.  I doubt many of these 95% of representatives receiving commission checks actually turn a profit.

Earlier this week I showed you how Fortune Hi Tech Marketing appears to be a pyramid scheme, rather than a legitimate “direct sales” company or multi-level marketing opportunity. Today we are taking a look at the recruiting aspect, which is what I believe makes FHTM cross over the line into the world of pyramid scams and Ponzi schemes. Last time I cited claims from participants in FHTM that recruiting was the true focus of the “business,” and today we’ll look at that a little more in depth.

There are so many ways to get people to buy into the idea of joining an MLM. These days, you will hear about unemployment and financial pressures, and how companies like Fortune Hi Tech Marketing offer an opportunity for unlimited earnings. The recruiters will tell you that even if you don’t get rich with FHTM, you can still make some money to help pay bills.

Be your own boss… make an unlimited income… control your own financial future… provide a better life for your family… pay a few bills each month… make money from things you’re already buying… All of these things sound attractive to almost anyone, and that’s why they are used in recruiting pitches.

More than a year ago, Medifast Inc. (NYSE:MED) sued me, my company Sequence Inc, Barry Minkow, his company Fraud Discovery Institute, Robert FitzPatrick, William Lobdell, and an anonymous message board poster for defamation. Barry Minkow and FDI initiated an investigation of the company in 2008, and the rest of us researched the company and contributed our opinions to FDI’s reports on the company and its multi-level marketing division Take Shape For Life (TSFL).

We criticized the company and its MLM business model. We expressed negative opinions about the disclosures Medifast makes about this “business opportunity.” I dared to suggest that Medifast might be a weight loss pyramid scheme.

A year after the first report on the company was released by FDI, Medifast sued us for $270 million, alleging defamation, criminal conspiracy, unfair business practices, and market manipulation. The defendants each filed anti-SLAPP motions, basically saying that Medifast was attempting to silence critics in violation of our First Amendment rights.

Fortune Hi Tech Marketing is one of hundreds of multilevel marketing companies that operate in the U.S through a combination of clever lawyering (“Let me show you how to set up your MLM so it appears to abide by the laws.”) and failure of law enforcement to enforce the laws against pyramid schemes and business opportunity scams (aided in large part by the Direct Selling Association and its lobbying efforts).

What makes FHTM different? Nothing, really. Every multi-level marketing company seems to claim it is different! It either has magic juice, special vitamins, the supposed opportunity to make money on things you already consume anyway, or any of a number of claims of uniqueness.

FHTM was founded in 2001 by former Excel Communications superstar Paul Orberson. This news story on Fortune Hi Tech Marketing from WHAS11 in Louisville, KY say that the company has 200,000 representatives and brings in revenue of $500 million per year. (Although the company’s CEO, Tom Mills, claimed he didn’t know how many representatives FHTM had. Incredible!) Oddly enough, this multi-million dollar business is run with only 60 employees at headquarters.

By Robert FitzPatrick of Pyramid Scheme Alert

Royal Canadian Mounted Police (RCMP) in the province of Manitoba in central Canada have brought criminal fraud charges against a multi-level marketing company that had been large, very visible and quite popular in Canada. The target of the fraud charges also include 12 consumers who had been active recruiters. The company, called Business in Motion (BIM), sold a package of travel discounts, and it offered each new salesperson the right to recruit other salespeople.

Like most MLMs, no payments were offered directly for recruiting, but only when a recruit “purchased” a product or sold one. As in some other MLMs, the salespeople were also purchasers of the product they sold. As others joined and “purchases,” were made, rewards accrued to those on the upper levels of the recruiting chain. As in all other MLMs, the recruitment chain was said to be endless and the opportunity “unlimited.”

UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

Nearly a year ago, Medifast Inc. (NYSE:MED) filed suit against me and several others, for what it claimed was defamation of its Take Shape For Life division (TSFL). My client initiated an investigation of Medifast more than year prior to the filing of the lawsuit, and published several reports on the company. I was retained as a consultant to do a small bit of analysis. Some of my work was included in reports published by the client, parts of which were reproduced on this blog, along with some of my own analysis of Medifast and TSFL.

TSFL is a multi-level marketing company which peddles weight loss products. It entices new “health coaches” to invest in the system with claims of “healthy body, healthy mind, healthy finances.” I was critical of this business model, as I frequently am with MLMs.

UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

Robert FitzPatrick filed an absolutely riveting anti-SLAPP motion in the case brought against us by Medifast Inc. (NYSE:MED) and its Take Shape For Life (TSFL) multi-level marketing division. Below is probably the most interesting part of the filing. It discusses at lengthy the shady past of the company, efforts to improperly conceal the prior bad acts, and current dishonesty about Medifast and TSFL. It seems that lying to the court has become routine for Medifast.

Proof that Medifast’s Complaint should be viewed as a SLAPP suit arises out of Plaintiffs’ false, self-serving and misleading allegations, devoid of any facts, as well as Plaintiffs’ fraudulent concealment of relevant facts that show what kind of history Medifast and its predecessor companies carry with them, but do not disclose to the public or its stockholders despite orders to do so by the FTC.

By Robert FitzPatrick of Pyramid Scheme Alert

UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

A Swedish film maker, WG Film, won a victory for free speech in California. The documentary film producer made a movie about Dole Food, called “Bananas!”, detailing how the company was using pesticides and how it was treating its Nicaraguan workers. The film wasn’t flattering and, naturally, Dole sued the company for defamation.

The producers filed an anti-SLAPP motion in California, saying that the the movie was protected as free speech. Dole then dismissed the lawsuit, but did so without prejudice, which left an open threat that the lawsuit could be refiled at any time.