From Pyramid Scheme Alert newsletter, by Robert FitzPatrick

The largest of all multi-level marketing companies, Amway, just agreed to pay $150 million in restitution and reform to settle consumer charges of fraud. The heart of the consumers’ complaints is that Amway uses false information to trick consumers into investing in its “business opportunity.” Among other reforms, Amway has agreed to change its “disclosure” of income averages. A similar lawsuit has been filed in Canada.

A front page story, USA Today on Oct. 15, 2010, entitled, “Fortune Hi-Tech: American dream or pyramid scheme?” documents widespread claims of deception, involving tens of thousands of US consumers, leveled against one of the newer and fastest growing MLMs. The MLM scheme has been prosecuted in two states and is under investigation by seven others states, according to the article. Misleading “disclosures” are at the heart of the charges and negative publicity.

The following is a summary issued by Robert FitzPatrick and Pyramid Scheme Alert about the historic class action settlement that was just reached with the Amway Corporation, the largest of all multi-level marketing companies.

Three directors and advisors of Pyramid Scheme Alert, including Robert FitzPatrick, served as experts and consultants for the victims in this case.

Amway has agreed to pay victims and cover litigation costs amounting to over $55 million in cash and products. A judicially administered fund will pay refunds to two classes of victims, those who joined and quit within a year, usually paying only initial fees,  and another group of those who stayed in longer and lost much more. Another $50 million will be paid in other costs incurred by Amway to meet the terms of the settlement.

Usana Watch Dog has been busy compiling more data about the Usana Health Sciences “business model” for distributors. He writes about what I already know from my years of research into multi-level marketing schemes: Nearly everyone loses money in these schemes, and those who do make  living are almost always those at the top of the pyramid. 99% of the people lose money so that a fraction of 1% at the top can make  the big money. That, my friends, is no legitimate business model.

Our friend Usana Watch Dog has compared the 2006 data compiled by Usana on their distributors to the data he was able to manually extract from what Usana currently publishes. You can see from the 2006 data that the vast majority of the distributors who are receiving commission checks are “sharers” or “believers,” and they were earning an average of about $200 per year. Incidentally, this $200 is not even enough to cover the minimum purchases the distributors are required to make in order to continue to be eligible to receive a commission check.

Lainie E. Cohen, Esq. arriving for my deposition (click to see full size)

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.

For nearly two years, Medifast (NYSE:MED) and its lawyers have known that I am not an appropriate target for a lawsuit. Nonetheless, they have pursued their malicious civil suit against me. Since the suit was filed, Medifast has been made aware of all the reasons why they shouldn’t be suing me:

• I never said anything false about the company
• I’m not aware of anything false that my co-defendants said, and which I later reprinted on this blog (and reprinting the writings of others does not make me responsible for those writings)
• Every bit of evidence produced during discovery shows that I was not part of any conspiracy, and that I actually went out of my way to make sure that false statements or assumptions weren’t made or published about Medifast

But why let a little thing like the truth get in the way?

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.

So who is short selling Medifast (NYSE:MED) stock? I’m not, but apparently plenty of other people are. (No, Medifast, I have no idea who it is, nor do I care who it is. That’s your problem. Not mine.)

As my readers already know, Medifast is on the hunt for anyone who would dare to say something less than flattering about the company. I’m being sued, along with others, for having a low opinion of Medifast’s Take Shape For Life (TSFL) division. Shame on me for voicing my negative opinion of a multi-level marketing scheme, and Medifast will MAKE ME PAY for daring to oppose them.

I am happy to report, however, that I’m not the only one who questions Medifast’s business model. Last week an article was posted at Fool.com about the amount of short selling activity around Medifast. Short selling is a bet that a company’s stock price will fall, and some like short selling overvalued companies.

A few years ago, I was involved in an investigation of multi-level marketing company (MLM) Usana Health Sciences (NASDAQ:USNA).  One of the allegations that came out during that investigation was that Usana was illegally conducting business in China. China has strict laws against multi-level marketing, making it impossible for the company to do business there under its current MLM model.

Usana had legitimate business operations set up in Hong Kong, which does not have laws prohibiting multi-level marketing activities. It was alleged that Usana was using the Hong Kong employees to get access to people from mainland China, and show them how to circumvent the laws to participate in MLM.

Medifast General Counsel Michael Tanczyn, Esq. at the deposition of Sam Antar. (click to enlarge)

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.

I am currently on the receiving end of a SLAPP suit, thanks to my good friends at Medifast (NYSE:MED) and their scam-like pyramid-like multi-level marketing division Take Shape For Life (TSFL).

SLAPP = Strategic Lawsuit Against Public Participation

It goes like this… Someone criticizes your company. You get mad. You decide to use your millions or billions of dollars to shut them up. But more importantly, it shuts up anyone else who would dare to criticize you or your company, lest they should also be on the receiving end of a lawsuit they can’t afford to fight.

These stories never get old. People criticize multi-level marketing in general, and particular MLMs specifically, and the lawyers come running. They cry that the bloggers are saying bad things about their companies, and that can’t be allowed to happen. Mona Vie doesn’t want you to know that their distributors are losing money left and right and the overall financial health of the company is being questioned.

None of the MLMs want us saying anything bad about the companies, especially if it’s true and might harm their recruiting efforts.

USANA Watchdog  just posted an article this morning which questions the active associate count of USANA Health Sciences (NASDAQ:USNA) and whether there is illegal recruiting of associates in China. Watchdog’s analysis of the numbers found some very curious things:

• Associates in Hong Kong have increased by 300% in the last three years, when the rest of the territories have seen decreases.
• Hong Kong has 1 associate for every 135 citizens. The market is either completely saturated or completely fabricated. Watchdog draws the conclusion that the associate count for Hong Kong more likely includes recruits from mainland China (where recruiting for MLMs is illegal).
• Associate counts in almost every territory have gone down over the last three years, but because of the way USANA presents the numbers in its SEC filings, it’s nearly impossible to see this.
• Something funny is going on the Philippines. During 2009, USANA was stating in its quarterly filings that they added 5,000, 5,000, 6,000, and 4,000 new associates there, for a total of 20,000 new associates in that territory in 2009. Yet the current associate count in the Philippines is 7,000.

Read all the details here: USANA’s Active Associate Per Territory, Evidence of Illegal Recruiting in Mainland China, and Misleading Philippines Associate Figures.<

Last month, Penn & Teller’s Showtime show Bullshit! featured multi-level marketing. They did an excellent job of hitting the high points on why MLMs almost guarantee failure for all the participants. Sure, there will be a couple of people at the top of the pyramid that make money, but that’s only because hundreds or thousands below them have lost money.

Lost money? Yes, MLM is all about losing money. They use a product as a “front” to hide this money transfer and make the scheme appear to comply with the law. But the products are of dubious quality, and significantly overpriced. MLMs aren’t really selling a product, they’re selling an “opportunity,” one in which almost everyone loses.

Here are some highlights from the episode: