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 Internet is filled with consumers reporting the same type of deception perpetrated by hundreds of other multi-level marketing companies. Virtually every household in America has been affected. The complaints are eerily similar: the “business opportunity” is falsely presented; failure rates are kept secret; false income “testimonials” are presented; the requirement for recruiting is hidden; pay-out data is manipulated and income “averages” are skewed; turnover rates are covered up; retail sales levels are not disclosed; significant additional costs are concealed. All these charges are about “disclosures” used to lure investors that are either false, misleading or are inadequate.
Yet, the staff of the United States Federal Trade Commission (FTC) is proposing to protect all MLMs from having to make disclosures regarding income claims! In an FTC process that began years ago, MLMs were to be included in a new rule that would protect consumers from false and predatory “business opportunity” solicitations. This was to be done by requiring greater disclosures about costs and potential income. But, after the political lobbying forces of the MLM industry were mobilized, the FTC reversed course and decided to protect MLMs, not consumers, with the new Rule. Recently, the staff issued a report that tightens the proposed Rule to make sure MLM companies are not covered by any disclosure requirements and that consumers who are lured to join MLMs are specifically not protected by the proposed Rule.
In a twist of logic, The FTC staff states that the proposed Rule “was designed to prevent fraud by prohibiting sellers from failing to disclose material information to prospective buyers.” The staff acknowledged, “It is beyond dispute that consumers should be protected against receiving inaccurate information and self-serving unsubstantiated claims from business opportunity sellers.” They confirmed the reality of widespread MLM business opportunity scams, noting “some MLMs engage in unfair or deceptive acts and practices, including the operation of pyramid schemes and the making of false and unsubstantiated earnings claims.” (It should be noted that a single MLM using false disclosures can harm hundreds of thousands of consumers and MLMs are the most common form of “business opportunity” that a consumer is likely to join.)
But, then, defying logic and reality, the staff wrote, “neither the earnings disclosure provided by the proposed Rule, nor alternatives proposed by commenters, would enable potential recruits to differentiate between a legitimate MLM and a pyramid scheme, or to inform consumers adequately about likely earnings.”
So, consumers have a right “beyond dispute” to accurate information in business opportunity solicitations, and it is known that MLMs engage in false business solicitations. But, according to the FTC staff, MLM fraud is apparently so tricky and clever, that even full disclosures would not help consumers understand they are being conned. And so, because MLMs are so sophisticated in deceptions, the FTC staff recommends that they be excluded from disclosure requirements!
If MLM fraud is so cleverly disguised that even full disclosure could not help consumers detect that they are being defrauded, would this not mean that even greater disclosure rules or more direct regulation of MLMs is needed?
In reality, disclosures would definitely and obviously help consumers avoid the financial traps set by MLM predators, and a fairly simple set of disclosures could enable consumers to judge the value of any MLM solicitations, which today they do not get. The FTC staff does, in fact, know how to write effective disclosure requirements. The necessary disclosures were presented to the FTC in writing in 2006 in official comments submitted in detail to the FTC by Pyramid Scheme Alert.