Posts Tagged ‘pyramid scheme’

Are All Multi-Level Marketing Companies Pyramid Schemes?

Recently Robert FitzPatrick of Pyramid Scheme Alert sent out a newsletter that included a discussion of the issue of whether all multi-level marketing companies are pyramid schemes. MLMs are frequently accused of being pyramid schemes, as we see has been the case with Mary Kay Cosmetics, BurnLounge, Herbalife, Medifast, Fortune Hi Tech Marketing, and Usana Health Sciences.

It is common for participants in multilevel marketing schemes to ask whether one MLM or another is also a pyramid scheme. Consumers are hoping that they have found the one legitimate or good multi-level marketing opportunity. The following information comes from Robert FitzPatrick’s newsletter article on the topic:

Article on NuSkin Fraud in China

Today Citron Research released a report on the fraud being committed in China by Nu Skin Enterprises. NuSkin is a multi-level marketing company based in Utah, and it trades on the New York Stock Exchange under the symbol NUS. This report is a follow-up to an August 2012 report in which Citron revealed its basis for alleging that Nu Skin was perpetrating fraud in China.

Citron first points out how dependent on China Nu Skin is.  In the second quarter of 2012, revenues from China were $57 million. In the second quarter of 2013, Nu Skin’s China revenue grew to $197 million. That’s a 245% increase. Without the China revenue, NuSkin’s year-over-year growth would be negative.

An expose was published in China on NuSkin. A translation of the page can be found here. The article accuses Nu Skin of running a pyramid scheme, using endless chain recruitment to bring new marks into the fraudulent business opportunity. Distributors are encouraged to buy inventory in quantities they will never sell, all to move up in the pyramid and qualify for commissions. (Incidentally, this is the same way that Mary Kay Cosmetics has been successful.)

Citron Research: Usana Health Sciences Operating Illegally in China

usana-health-sciences-chinaAllegations of cheating in China are nothing new for Usana Health Sciences (NYSE: USNA).  In 2007, the Fraud Discovery Institute accused Usana of doing business illegally in China.  The country has very strict laws against multi-level marketing (MLM). It is strictly forbidden. Yet for years Usana has been getting around this rule by having distributors from mainland China do business through Hong Kong, where MLM is legal. When asked about the activity in Hong Kong versus China, the company has been deliberately vague.

In November 2012, Citron Research published a report on Usana’s activities in China. The report discussed law enforcement activity related to illegal MLM operations. Usana was criticized for not disclosing these material events (arrests and fines for distributors) in its SEC filings.

Dave Ramsey Officially Sucks

dave-ramsey-sucksI have always been a big Dave Ramsey fan, and believed that his financial advice for consumers is first rate. But today Dave Ramsey got it wrong in a big way. On his blog, he published an article about making money in multi-level marketing.

The article failed to acknowledge the fact that over and over again, it has been proven that 99% of people involved in MLMs lose money. Front and center in the article was this lie:

Truthfully, if you have a go-getter personality, and you can follow some basic business and personal etiquette, you can make a lot of money in an MLM. The trick is to avoid all the potential pitfalls along the way.

Truthfully? No, there is no truth in what was said.

Is Usana Running an Illegal Pyramid Scheme?

usana-health-sciences-chinaAll good multi-level marketing companies have one thing in common: They fail to disclose enough information to allow consumers and regulators to determine if they are in the business of recruiting or selling products. They disclose just enough facts and figures to make it appear that they are being transparent. But they hide enough information that no one could ever determine definitively if they are running pyramid schemes.

MLMs cleverly avoid the pyramid scheme issue by making it impossible to determine the level of retail sales of products to consumers.  The companies effectively use the technique of plausible deniability: They purposely do not track retail sales, so when the business model is challenged with the assertion that few retail sales occur (and therefore they are recruiting schemes), executives can claim that they know no such thing!

Usana Watchdog has released a report on Usana Health Sciences, challenging the company’s failure to reveal meaningful facts and figures that would allow consumers and law enforcement to determine whether the company is running an illegal pyramid scheme.

Xyngular: Starve, Binge, Purge, Repeat!

direct-selling-pyramid-schemeMulti-level marketing companies are getting lots of attention lately thanks to the Bill Ackman smackdown of Herbalife in December. MLMs offering “nutrition products” are of special interest to consumers, and with good reason. Companies like Isagenix, MonaVie , Usana, Mannatech, and Shaklee all offer magic potions that claim to help you lose weight, absorb more vitamins and minerals, and cure all diseases.

Of course, many of these health claims are strictly prohibited. Nutrition MLMs generally have disclaimers stating that their health claims have not been evaluated by the Food and Drug Administration, and that the products are not intended to diagnose, treat, cure or prevent any disease. But that doesn’t stop the distributors for making such claims, and the company management turns a blind eye to it.

Is Multi-Level Marketing a Legitimate Business Method?

pyramid-scheme-mlmDefenders of multi-level marketing (MLM) are often heard saying that it’s a legitimate business method! Even government regulators say MLM is legitimate. And it is true that state and federal governments in the United States generally allow multi-level marketing companies to operate with little oversight. This is despite the fact that structurally and operationally, MLMs are nothing more than pyramid schemes.

Oh sure, the MLMs are careful to use lots of window dressing that makes it appear they don’t violate anti-pyramiding laws. There are even lawyers who whore themselves out to tell owners of MLMs how to “stay legal.” And of course, the massive lobbying on behalf of “direct sellers” and multi-level marketing companies ensures that current laws against pyramid schemes will not be enforced, and that no new laws impeding MLMs will be enacted.

Yesterday the Chicago Tribune ran a piece on multi-level marketing, specifically referring to Herbalife and Fortune Hi Tech Marketing. Typical positive MLM talking points were cited:

Are Herbalife and FHTM Similar?

fhtm-herbalifeWith yesterday’s shutdown of Fortune Hi Tech Marketing, consumers have been asking if Herbalife is a similar operation. Last year Herbalife’s business model was called into question by David Einhorn, and then the company was accused of being a pyramid scheme by Bill Ackman.

Naturally, Herbalife denied being a pyramid scheme. Management has repeatedly said that Herbalife is all about selling products, and that the products are indeed selling, so it couldn’t possibly be a pyramid scheme. But according to this (start at 2:00 mark), no one really knows how much product is being sold to actual consumers. To be clear: Herbalife does not track retail sales.

I previously compared Herbalife and BurnLounge, a company shut down by FTC because it was a pyramid scheme. (BurnLounge is currently appealing, but that is a story for another day.) Today we compare Herbalife and FHTM:

Fortune Hi Tech Marketing Pyramid Scheme Shut Down

Fortune Hi Tech MarketingFortune Hi Tech Marketing (FHTM), a multi-level marketing company I’ve reported on previously (and was interviewed about) was shut down today by the Federal Trade Commission. It is being reported that federal agents raided the company’s Lexington, Kentucky office.

Law enforcement says that 100,000 people across the country were recruited into FHTM, each paying $100 to $300 per year for the right to receive recruiting and sales commissions. A complaint was filed against Fortune HiTech Marketing on Thursday, and the judge issued a temporary restraining order to shut the company down.

Steve Baker, the head of the FTC’s midwest office said “..the plan was set up so that 96% of people lose money.”  He also said:

More on Herbalife, Bill Ackman, and Law Enforcement

As we patiently wait for Herbalife’s “analyst and investor meeting” on January 10 to address the pyramid scheme allegations made by short seller Bill Ackman, there is plenty of good discussion of HLF around the world wide web.

Kid Dynamite said Bill Ackman is wrong about Herbalife, citing that:

  • HLF  is not a pyramid scheme because commissions are paid based on sales of products, not recruitment (Wrong. Commissions are paid largely based on required minimum purchases of products by recruits.)
  • Herbalife has not committed accounting fraud in reporting their product sales. (I’m not so sure about that. The numbers as reported are deliberately and materially misleading.)
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