MLM Critics

Income Opportunity, A Special Consumer Report

Tens of billions in consumer losses are caused annually by MLM Recruitment Schemes as 99+% "fail" each year in these "business opportunity" scams.

* Before you join an MLM, read this document.
* If you have a question about an MLM you are already in, read this document.
* If you are concerned about a friend or relative who has joined an MLM, read this document.

Download in PDF file

The Internet Is full of Pyramid Schemes. Matrix Schemes, Autosurfing, Prosperity Plans and Website Search Submissions... On and on it goes!

See a Chicago Public TV Documentary on oneInternet-based Scheme Robert FitzPatrick interviewed on WTTW (Real Player Streaming Video)

Is it a Pyramid Scheme?
Airs Tues. and Wed., December 20 and 21, at 7pm

The internet is full of "golden opportunities" to get rich. Some are legitimate businesses; others are just new versions of old-fashioned pyramid schemes. When one company, EZ Wealth by Design, launched in March, 2005, many people signed up believing they were promised $36,000 in 28 weeks. Today some are calling it an illegal pyramid scheme. Hear what the company's founder thinks.

The Future of Futures
Airs Tuesday, November 29, at 7pm

Chicago was the birthplace of the modern futures markets, and today it's home to the world's busiest exchanges. But in the last few years this local icon has been undergoing a radical change. After more than a century of trading amidst the hustle and bustle of "the pits", many brokers are now doing their work electronically at computer screens. So what will this change mean to the trading floor culture that we've all seen in the movies and on TV?


Is Your Pension Safe?
Airs Tuesday, November 15, at 7pm

Is your pension safe? From bankrupt steel companies to bankrupt airlines, more and more companies are dumping out of promised pension benefits to their workers. Elizabeth Brackett looks at the what America's workers are facing in their retirement years as they struggle with broken promises and broken dreams.

By Jon M. Taylor, Ph.D., President, Consumer Awareness Institute and Director, Pyramid Scheme Alert

1. Summary of what was learned from these studies

Are MLM’s* (multi-level marketing or network marketing companies) legitimate? Or are they thinly disguised pyramid schemes that enrich a few at the top of a pyramid – at the expense of a multitude of unwitting downline victims? If the latter, then consumers, the press, consumer protection agencies, and investors (for publicly traded MLM companies) have been duped into accepting it as legal and ethical, when in fact it is not.

Who, if anyone, is making money in Amway/Quixtar, Nu Skin, Usana, and a myriad of other MLM programs? Until recently, there were few solid numbers to back up claims, pro or con. Previous attempts to get MLM companies to release valid data have been met with avoidance1, and data they have provided is often misleading2. But there is one group of experts that knows who is actually reporting profits—CPA’s and other preparers of tax returns.

We performed a telephone survey of over 200 tax preparers in Idaho and Utah, a hotbed of MLM activity. We also did a randomized survey of households in Utah County, which has the highest concentration of MLM companies in the country. The findings led to the following conclusions:

1. Direct sales to consumers by MLM "distributors" (in quotes because they are primarily buyers, not distributors**) are extremely rare, even in Utah County. Almost all MLM’s are not direct sales companies, in spite of what they claim. Instead, most sales are to recruits who are led to believe that the MLM is a "business opportunity" and that aggressive recruiting and ongoing purchases of products will qualify them for ascending levels of commission payouts.

2. Most recruiting for Utah MLM’s is done outside Utah, presumably because de facto market saturation in Utah has stiffened resistance to buying into the MLM’s. So MLM promoters go to other states, and then from one foreign country to another to keep the scheme going. Or they sometimes start new product divisions to cycle the pyramid anew. MLM’s like Nu Skin and Usana become, in effect, Ponzi schemes, by recruiting new investors in their schemes to pay off earlier investors. About 99.9% lose money.

3. Commissions paid by the company to "distributors" are not enough to cover their expenses, so almost all lose money, with the rare exception of those at the top of a hierarchy of "distributors." We’ll call them "TOPP’s" for "top of the pyramid promoters." This occurs because MLM compensation plans leverage the efforts and investments of recruits so that large commission checks go only to TOPP’s. However, based on extensive analysis of available public documents, about 99.9% of total participants (those beneath the TOPP’s in the overall pyramid of participants) lose money. A sizable number of the few TOPP’s who do profit live in Utah County.

4. In counties where no MLM’s are based and where few upscale residences are located, no participants in MLM programs reported significant profits over any significant period of time to preparers of tax returns. Many of these preparers have noticed this and view MLM’s as scams – because in a legitimate business at least a reasonable percentage who work in the business would show a profit.

5. Prospects are led to believe that they can earn a substantial full or part-time income and gain "time freedom" by investing in the program in the form of ongoing product purchases. The total of these purchases constitute disguised or laundered investments in a product-based pyramid scheme.

6. The combination of nutritional supplements with MLM as the vehicle for marketing them creates a double whammy of opportunities to defraud consumers. Consumers (at least in Utah) are not well protected by law enforcement against "recruiting MLM’s" and are further left vulnerable to exploitation in the sale of nutritional supplements by liberalization of legislation affecting such products.

7. The MLM corporations which are publicly held are misrepresenting their core business when they claim to be selling direct to consumers, when in fact they are selling primarily to "distributors" – on false pretenses of being a profitable "business opportunity."

2. When is an MLM merely a pyramid scheme?

Recently, I completed an analysis3 which compared MLM to legitimate marketing models to which MLM is often compared, such as direct sales, insurance, franchises, etc. Five key characteristics of MLM compensation plans were identified, which distinguish most MLM’s from all other marketing models and which lead to large losses by downline participants. (It is in the nature of pyramid schemes for the money to go to the person at the top of a pyramid of participants, with the vast majority of participants found to be in a losing position at the bottom – regardless of when it collapses or is terminated.)

MLM programs which have the five characteristics just mentioned in their compensation plan can be considered "product-based pyramid schemes," or "recruiting MLM’s"4 because their compensation plans reward the recruiting of "distributors" (through commissions from their purchases) more than selling direct to consumers. "Distributors" have to purchase products from the MLM in order to participate in the business. So the cards are stacked in favor of recruiting and selling products to new recruits, rather than selling direct to consumers.

THE FIVE KEY CHARACTERISTICS, OR "RED FLAGS," OF A PRODUCT-BASED PYRAMID SCHEME

1. Recruiting of participants is unlimited in an endless chain of empowered and motivated recruiters recruiting recruiters.

2. Advancement in a hierarchy of multiple levels of "distributors" is achieved by recruitment, rather than by appointment.

3. Ongoing purchases by "distributors" are encouraged in order for them to be eligible for commissions and to advance in the business ("pay to play").

4. The company pays commissions and/or bonuses to more than five levels of "distributors."

5. For each sale, company payout (in commissions, bonuses, etc.) for the total of all upline participants is nearly as much as (and may even exceed) that for the front line participant actually selling the products – creating an inadequate incentive for direct selling of products and an excessive incentive to recruit.

Intensive recruiting (encouraged by compensation and marketing plans with the above features) makes possible commissions from easy sales to a multitude of downline recruits who are motivated to buy products to "play the game." This results in an extreme concentration of company commissions to TOPP’s.

I classified rare MLM’s like Pampered Chef, which pays the bulk of its commissions to persons selling products to actual customers and which limits the number of levels on which commissions can be paid to less than 5 levels, as "retail MLM’s." Occasionally participants in retail MLM’s report modest profits, even without a large downline. So retail MLM’s (less than 1% of all MLM’s) were excluded from this analysis.

These "five red flags" appear in compensation plans for almost all MLM’s, including those based in Utah. Their loss rates are horrendous. Where data has been available on recruiting MLM’s, approximately 99.9% of participants were found to lose money (based on analysis of court records, FTC and SEC filings, internal and public documents, etc). So only about one in 1,000 participants profit—the TOPP’s. The rest lose money, after subtracting all business expenses (including product purchases to "play the game").

3. Utah – a hotbed of MLM activity – is a good place to seek answers.

There is a high concentration of MLM companies based in Utah. (Nu Skin and Usana are two notables.) Utah County, in particular, is a hub of MLM activity. With at least 11 recruiting MLM’s in a population of 398,056 (2002 census estimate), that’s about one MLM for every 33,503 people – considerably greater density of MLM’s than any other county in the country. So what better place to study the profitability of MLM programs than in Utah? Surveys have shown a fairly consistent rate of 5-6% of Utah households participating in MLM as a distributor at any given time.5 Approximately, one in five (21%) have participated at some time during their lifetime.

4. MLM – a business with no customers!

Most MLM claims to be doing "direct selling" in MLM is mere pretense. MLM promoters tout their programs as "direct sales" alternatives to standard retail outlets—to avoid being prosecuted by the FTC and by state regulators for conducting pyramid schemes (see FTC rule below). However, if MLM’s were in fact emphasizing direct sales, one would expect Utahns to be bombarded with persons selling products from Utah MLM’s like Nu Skin and Usana, but they are not.

A recent survey we conducted in Utah County, where MLM is most concentrated, showed that 6.9% of households (about one in 15) had been approached to buy MLM products (from recruiting MLM’s) in the past year – without being sold an "opportunity" connected with the purchases, usually at "opportunity meetings." Only 1.1% actually made purchases from an MLM company.6

During the same period, 56% of households in Utah County had been approached to participate in an MLM "opportunity," and 4.6% actually joined. Four "distributors" per customer suggests a market selling to "distributors," not a market of direct sales to legitimate customers.

The FTC definition of a legitimate MLM includes a rule allowing no more than 30% of its sales to "distributors". This hardly seems possible in Utah County because four times as many "distributors" are being recruited as customers are buying. In its latest SEC financial statements, Usana admitted that "preferred customers" accounted for only 15% of its retail direct sales. Based in this report, an unbiased observer would find few actual buyers other than recruits who invest in the "opportunity."

These findings raise some important questions:

—What kind of business has no customers? (only MLM’s pretending to be "direct sellers")

—Who is buying the products that account for billions in revenues reported by Utah County MLM’s? Not residents of Utah County, where many TOPP’s are .located. Their "distributors" are their main customers.

—If there are no direct sales to speak of, then who is making profits off of these supposed sales? (the TOPP’s – and company founders and officers)

5. Who has the data? Preparers of tax returns do! Many notice no profits reported by MLM clients.

A manager of H&R Block in northern Utah, told me that during his 25 years of doing over 12,000 tax returns a year between he and his group, they could not remember a single client who had reported a significant profit over any appreciable period of time in MLM! (One reported a sizable profit one year – but went bankrupt the next.)

Another accountant told me of a seminar company that trains tax preparers across the country. The topic of MLM’s often comes up in connection with "hobby losses," and the concensus is that it is extremely rare to see profits from MLM participation. And a tax software

developer, who dealt with thousands of tax preparers across the country, said he had asked about 100 of them if they had ever seen a profit reported from MLM participation. None had. This was out of a total of over a million tax returns.

To confirm this, I performed a telephone survey7 of the people who should know if profits actually occur from MLM participation—the persons who prepare taxes for the most concentrated population of MLM participants – Utahns. What I found confirmed what we have suspected for many years, but for which we had little objective proof— except in the case of a half dozen programs, like Nu Skin, Amway, and Melaleuca, for which we already had good data. A few TOPP’s are getting rich at the expense of a multitude of downline recruits, who invest in products to participate in the MLM program on the basis of misrepresentations regarding income potential. (See Table 1—and other reports cited in END NOTES.)

It was tricky to get tax preparers to give out the information I sought. Since it is considered unethical for tax professionals to divulge confidential tax information of their clients, I had to approach this survey very delicately. I began by sharing that I had learned from other tax professionals. I reassured them that I was not asking them to disclose information from specific clients, but simply wanted to know if their experience corresponded with what I had learned from others. Most of them had already observed the same thing – that almost no one was reporting profits on their taxes from participating in MLM. They could not recall anyone ever reporting a significant income from MLM (with the exception of Utah County, which will be explained later). Using this approach, only one Utah County tax accountant refused to cooperate.

6. Three Utah counties have no MLM companies based therein, but thousands of MLM "distributors" – NONE of whom reported ongoing profits.

Three counties in Utah were identified where there are no MLM companies based and few upper crust areas where TOPP’s are likely to dwell. The three are Tooele, Uintah, and Grand Counties – to the west and east of Utah County.

I called all of the tax preparers (including CPA’s) that I could reach in these three sparsely populated counties (total population 80,660) – 33 total preparers, who had an aggregate total of about 14,400 clients in 2002. Over the course of their careers, the aggregate output of these preparers was over 300,000 total tax returns. Though many clients had at some time participated in MLM, these preparers could not recall even one client having reported significant profits over an extended period of time in MLM. (Two clients had a few years ago reported a small income from MLM recruiting back East, but both had quit within two years – hardly the “lifetime residual income” touted by TOPP’s at MLM opportunity meetings.)

7. MLM participants "pay to play" the MLM game. Gamblers fare much better.

Though tax preparers in Tooele County reported no net income from MLM, over 300 clients had reported significant gambling winnings in Wendover, Nevada, nearly 100 miles away. Two had become millionaires. (See the chart "Which Does the Greater Harm?"8 which compares odds of winning in gambling to MLM.)

8. It’s the TOPP’s (Top of the Pyramid Promoters) – and MLM company officers – who are raking it in, especially in Utah county.

Then I called preparers of tax returns in Utah County tax because I suspected most TOPP’s 9 would reside near MLM headquarters. (The earliest ones in an MLM tend to make the most money, and living near the company’s headquarters should be an advantage.)

That was interesting. For comparison, I called 33 (a number equivalent to the first survey) Utah County CPA’s who do taxes. Bingo! Between them they could recall approximately 185 tax returns showing significant ongoing profits from TOPP’s in MLM during their careers. Last year alone (when recall would be most accurate), these 33 CPA’s taken together could recall 38 clients who had reported large profits from a variety of MLM’s—mostly companies based in Utah County such as Nu Skin, Enrich (now Unicity), Morinda, Synergy, and Neways.

These TOPP’s were gaining most of their commissions from sales to a large downline of out-of-state recruits. Some TOPP’s were reaping checks ranging from tens of thousands of dollars a month to close to $1 million a month! Having a few rich "distributors" at the top of the pyramid is critical to the success of any pyramid scheme because they model "success", which helps entice others to join. The other major benefactors from these MLM’s are founders and company officials who manage the infrastracture.

Though TOPP’s establish headquarters in Utah County from which to start recruiting a downline, they soon find local prospects resistant to "another MLM," so they travel to other areas where they can recruit "distributors" to whom they can sell products to "build the business." Then, as additional areas open up for recruitment, the TOPP’s rush in to be the first to build a downline. And since investors must go elsewhere to recover their investments, the MLM’s thereby evolve into Ponzi schemes.

Again, the finding of profitable tax returns for TOPP’s residing in Utah County represents only a tiny percentage (less than 1%) of MLM "distributors." The rest lose – which poses an interesting question: What kind of business would have hundreds of thousands of "distributors" working for nothing – almost all of them at a loss? Answer – product-based pyramid schemes, or "recruiting MLM’s".

9. CPAs’ low opinion of MLM is influenced by experience with tax clients who participate in MLM.

And what did Utah County CPA’s think of MLM?

*

"It’s like any other business. Those who don’t make the effort will fail."
*

"The problem is that the majority of people who sign up and expect to make money don’t really know how to sell – or don’t ‘work the system."
*

"You have to work at it and be patient. If you stick with it, it can be very profitable."

Seeing TOPP’s regularly as clients, MLM was not seen by Utah County CPA’s as a scam.

Contrast these reactions with the opinions of CPA’s and other tax preparers in the three counties where no MLM profits were reported (and where no MLM’s are based):

*

"There’s money to be made in MLM – at the top."
*

"I would never advise a friend to do MLM – unless he needs a tax write-off."

Some were even more critical:

*

"It’s a scam."
*

"It’s a pyramid scheme."
*

"It’s quasi-evil."

It appears that we see in MLM the most unique of business models—a profitable business with no real customers – and almost all "distributors" losing money!

10. Stocks of MLM companies are a questionable investment. Not only are there few if any customers, but almost all distributors – on whom the business depends – are losing money (except for those at the top).

With the recent run-up in price of stocks for Utah MLM companies such as Usana and Nu Skin, one has to wonder – just how solid are these companies?. They are, after all, totally dependant for their success on the success of their "distributors." Or is it possible that MLM "distributors" need not make a profit to be a success? In a legitimate business this would be the case, but in MLM downline "distributors" continue to purchase products on the basis of false promises that things will get better. Only they seldom do. Eventually, almost all drop out, and TOPP’s merely recruit more "distributors" to replace them. In this way TOPP’s cycle through pyramidal recruitment in an endless chain of victims. It is astonishing and outrageous that authorities allow this charade to go on indefinitely.

Why would anyone invest in such a "business?" If the truth were widely known about these companies, no one would sign up as "distributors", and investors would be left holding the bag for collapsed pyramids!

MLM officials counter that the "better MLM’s" offer a one-year return privilege for unused and unopened merchandise, usually subject to a 10% re-stocking fee. Refund requests are occasionally filed and satisfied. However, in ten years of research on this topic, I have yet to see a victim of a recruiting MLM become fully aware of the extent of the misrepresentations and fraud committed by the MLM company within one year of quitting. And they have usually used or opened the merchandise (being encouraged to do so to "build the business") and nullified the return privilege.

Unfortunately, victims seldom complain to authorities, blaming themselves for their "failure." And some fear consequences from or to their upline – which could be a sibling or best friend.

In April of 2003 I advertised for ex-distributors of Nu Skin Enterprises, Inc., to call and receive information that had been gathered about Nu Skin’s misrepresentations since its founding in 1994. After reading the REPORT OF VIOLATIONS that was filed with the Federal Trade Commission and with Utah’s Division of Consumer Protection, about two dozen victims of Nu Skin’s program could see clearly how Nu Skin had misled them. However, after almost a year of working with them, only two persons were brave enough and determined enough to come forth and file complaints—even though some had lost thousands of dollars. Since so few complain, law enforcement rarely takes action, and the fraud goes on.

TOPP’s prefer certain tax preparers. The tax preparers we surveyed could be clustered. Those who did taxes for one TOPP tended to do taxes for several. (MLM people “network” – remember?) The bulk of the TOPP’s were served by a half dozen preparers. I noted that in one CPA firm, a single Utah County CPA had seen almost 100 profitable MLM returns during his 25-year career – while a partner in the same firm had never in 30 years seen one MLM client report significant profits (of over a few hundred dollars, which usually winds up being a loss, if purchases from the company are subtracted).

One might expect that high-rolling TOPP’s would go to CPA’s, rather than to tax firms with lesser credentials. To check this, I called 33 non-CPA tax preparers in Utah County (like H&R Block and Jackson Hewitt). From these firms, only five returns had shown a significant profit last year from MLM participation—all from the same tax preparer. It seems the big TOPP’s prefer to use CPA’s for tax work, especially when commissions – and tax liabilities – are very large.

Other observations of preparers. One tax preparer from H&R Block in Utah County, who had prepared over 10,000 returns over 32 years, said that all his MLM clients lost money, which averaged about $1,500 each.

I called tax preparers in several other counties in Utah and Idaho – another state where some MLM’s are based, but not with as much concentration as in Utah. Again, a rare few TOPP’s reported profits, but the vast majority of participants reported losses. Over and over it was reported that no MLM participants reported significant profits selling products directly to consumers. Primary customers were their downline of "distributors"—usually from other areas.

Utah TOPP’s are not recruiting successfully in Utah, but they are elsewhere. Not only are TOPP’s and their local downline not selling direct to local consumers, many Utah prospects are fed up with MLM recruiting. Though 56% of households in Utah County were approached to participate in an MLM "opportunity" last year, only 4.6% actually joined – and that is for all MLM’s combined!. So where are TOPP’s recruiting? Primarily outside Utah, where some have recruited huge downlines from less resistant populations – many of them in vulnerable countries overseas. Nu Skin, for example, has for several years gotten most of its revenues from unwitting Asian recruits.10

11. MLM and nutritional supplements – the perfect combination for scams.

Combine MLM misrepresentations regarding distributor earnings with the supplement boom, and you have a perfect recipe for consumer abuse—or legalized fraud, as some may call it. Since the passage of The Dietary Supplement Health and Education Act (DSHEA) in 1994 – drafted by Utah’s Senator Orrin Hatch11, which exempted companies that make supplements from seeking FDA approval before going to market, TOPP’s in MLM’s have gotten away with extravagant claims to recruit "distributors" and sell products. At least we know who’s getting the money in these MLM programs— and it’s not the people that buy into the "opportunity."

12. Do MLM expenses qualify as tax write-offs?

Many tax return preparers noted that a lot of MLM participants attempt to write off expenses from MLM year after year. These expenses are often very significant. They have been allowed to deduct them for three of five years so as long as "a business intent" can be shown.

Since almost all MLM’s are merely product-based pyramid schemes, should expense write-offs be allowed (beyond offsetting revenues)? Gamblers and sponsors of race horses have severe limits on expenses that can be written off. Since the odds for many games of chance have been found to be better than the odds of profiting from a recruiting MLM, perhaps the same limitations should apply.

Billions in federal and state tax revenues are forfeited, to say nothing of the tens of billions of dollars lost each year by MLM participants. Perhaps if MLM’s expenses were disallowed by the IRS, fewer recruits would join up.

13. What can be done about MLM abuse?

Consumer protection and other law enforcement personnel can get informed so that when MLM companies attempt to dupe them with claims of being legitimate "direct sellers," they can use the "5 Red Flags" discussed above to refute their claims. (See End Note 2 for a thorough explanation of the "5 Red Flags.") Also, with product-based pyramid schemes it is most effective to be proactive, rather than reactive. If an agency waits for complaints to mount up, it is usually too late to take effective action to protect consumers. The damage is already done and, in Ponzi fashion, the TOPP’s will have moved on to other areas.

Ex-distributors willing to complain are the most potent witnesses against pyramid schemes. If you suspect misrepresentation and pyramid scheme abuse, be vocal and assertive in registering your complaints. Contact your state consumer protection agency—and the FTC for action on a federal level. You may get little attention acting alone, but if enough consumers complain, the agencies may at least try to contain the abuse. Unfortunately, in law enforcement it is often the squeaky wheel that gets the grease.

You can also write letters to your local newspapers. Negative publicity is often the strongest weapon against MLM’s because it makes recruiting more difficult. If you warn and save one person from being defrauded by a recruiting MLM, make copies of this report and suggest that the person use it to warn five others and that they use it each warn five others, who in turn each warn five more, etc., etc.

Source: www.mlm-thetruth.com

How do prices for products from MLM companies compare with alternative outlets?

Not very well. In spite of the claims of MLM/DSA communicators that most MLM participants sign up to buy the products at a discount or to resell them for “a little extra income,” the facts do not support either claim. MLM products purchased at wholesale prices are so expensive that few persons can be successful in selling them at retail prices for a profit. Also, since MLM sponsors have struck a deal with state tax commissioners, requiring sales taxes to be paid on wholesale purchases, and since shipping charges to one's home must be added, the margin is too slim to provide much incentive for direct selling to non-participants.
To check this out, I asked representatives from ten MLM companies for the prices of their "best reasonably priced formulation of multi-vitamin multi-mineral products, with antioxidant protection." Then I asked ten retailers of health foods likewise to give me prices for their " best reasonably priced formulation of multi-vitamin multi-mineral products, with antioxidant protection." Interestingly, representatives for each of the health food stores recommended a different product. Here are the results:




From MLM sponsors (including Pharmanex, Quixtar, Melaleuca, Shaklee, Usana, Isagenix, Sunrider, Herbalife, Arbonne, and Neways).


Ten separate products from ten separate retail outlets.

Average cost per person per month - retail prices


$61.22 (not much less at wholesale, after taxes and shipping are added)


$11.52 (including shipping)

The same observation could be made for other products and services offered by MLM companies – telecommunications, Internet services, fuel additives, financial services, etc. They must claim uniqueness and they must charge enough to support payments to a bloated organization of thousands of "distributors."
NOTE: To see a powerful example of how overpriced some MLM products can be, see the YouTube video on USANA prices by Barry Minkow of Fraud Discovery Institute.

Another option for getting MLM products cheap - ebay!

If you really want some specific MLM products, but don't want to pay exorbitant prices, there is another option some people are discovering – ebay. Ex-participants often seek to unload these overpriced "potions & lotions" – or other MLM products far below wholesale! Just click on the "Buy" tab, select the product category (such as "health & beauty"), enter the name of the company, click "search," and see what you get. Here are some examples: For Usana, I found (among a variety of Usana products) Healthpak 100 going for about $34 (US) plus shipping. For Pharmanex (Nu Skin), I found LifePak for $0.99 (US) plus shipping. Melaleuca's Vitality Mineral Complex was going for $2.01 (US) plus shipping.

___________________________________
Opinions of experts about "potions and lotions" typically offered by MLM companies

After studying over 250 MLM programs, it has become apparent that a typical strategy of MLM sponsors is to produce supplements that supposedly cure or prevent every disease under the sun. It seems nearly every MLM company lays claim to the latest and greatest supplement that cannot be obtained anywhere else at a comparable price. They even claim to “bypass the middle man,” when in fact with their endless chain of recruitment, they create thousands of middle men– all hoping for a share of commissions. (See "Typical Misrepresentations . . " used in MLM recruiting and "5 Red Flags of a Product-based Pyramid Scheme" and other reports on the MLM Regulation and MLM Research pages of this web site.)
I consulted three experts on the validity of typical claims by MLM companies about the superior benefits of their products, which are used to justify their high prices. To protect their professional reputations, I am not publishing the full names of two of them.
The first was Lane, a nutritional scientist and the former vice president of product development for one of the leading MLM's, who told me that the product claims of these companies are overblown and misleading. “The modern version of snake oil,” he called them. He said the supplement industry is rife with people making fraudulent claims, especially MLM promoters. He was very critical of MLM sponsors who promote products with exotic secret ingredients obtained from some remote island, etc. He said the best way to get needed vitamins and minerals is from a healthy diet.
The second was Allen, a nutritional formulator who has manufactured numerous supplements for both MLM companies and standard supplement companies that sell to health food stores. “This is a scumbag business,” he grumbled. He told of his desire to get MLM promoters to buy quality formulations, using top-quality ingredients. He said that In every case, they chose to cut corners so as to allow plenty of margin to pay their many levels of distributors. For example, if a product sold for $50, they would not pay over $5 in production costs.
The third is Dr. Stephen Barrett, a medical doctor who has spent many years exposing all kinds of health quackery. He also recommends a healthy diet as the best source of needed nutrients. However, there are special cases where supplementation is needed, and this should be done in consultation with your doctor. Read his report on Quackwatch. He also has done much writing and research on MLM supplementation. Check out his many articles on MLM Watch.
I have read reports that many nutritional scientists do take supplements, but usually in modest amounts, not megadoses. They often explain their use of supplements as “insurance” to make sure they get what they may be missing in their diet. But they buy reasonably priced supplements and focus on a nutritionally sound diet.
Does anti-oxidant supplementation extend life and improve general health?

Image: Vitamin EA review of dozens of studies delivers blow to popular antioxidants.
Researcher found that the popular antioxidant vitamin E doesn't lead to a longer life. Neither do vitamins A or C. But experts are divided on whether that means you should skip the pills altogether.
(MSNBC- Associated Press, Updated: 4:18 p.m. MT Feb 27, 2007)

Antioxidant vitamins, including A, E and C, don’t help you live longer, according to an analysis of dozens of studies of these popular supplements. The new review showing no long-life benefit from those vitamins, plus beta carotene and selenium, adds to growing evidence questioning the value of these supplements.
Some experts said, however, that it’s too early to toss out all vitamin pills — or the possibility that they may have some health benefits. Others said the study supports the theory that antioxidants work best when they are consumed in food rather than pills.
An estimated 80 million to 160 million people take antioxidants in North America and Europe, about 10 to 20 percent of adults, the study’s authors said. And last year, Americans spent $2.3 billion on nutritional supplements and vitamins at grocery stores, drug stores and retail outlets, excluding Wal-Mart, according to Information Resources Inc., which tracks sales.
The new study, appearing in Wednesday’s Journal of the American Medical Association, was led by the Cochrane Hepato-Biliary Group at Copenhagen University Hospital in Denmark. The Cochrane organization is a respected international network of experts that conducts systematic reviews of scientific evidence on health interventions.
For the new report on antioxidants, the researchers first analyzed 68 studies involving 232,606 people and found no significant effect on mortality — neither good nor bad — linked to taking antioxidants. Read the full news report. Read also the report released on the Today Show.

Source: www.mlm-thetruth.com

by Robert L. FitzPatrick

Hundreds of thousands, maybe millions, of Americans have recently been solicited to join the various versions of the "Gifting" Pyramid Scheme. The most recent version of this scheme is spreading faster and reaching many more people than any others. This one appeals specifically to women.

All pyramid schemes permeate existing social groups. Among those that have been infected with the fraud include Hispanics, African Americans, New Age-minded people, fundamentalist Christians, and college students. American women (and now also in the UK where the scheme is spreading rapidly) represent the largest subgroup ever to fall into the folly of popular pyramid schemes.

Why have so many joined? Why have so many continued to participate even after news reports, Better Business Bureaus and government rulings state plainly that the scheme is illegal and the participants can be prosecuted.

Typical news reports say its is demon GREED. However, from the studies and analyses conducted at Pyramid Scheme Alert, we know that it is far more than that. In fact, it has never been shown that the people who join are the more avaricious people in their respective communities. Our observations show that most people who participate in pyramid schemes are not crooks and liars. The victims and the perpetrators (in a pyramid scheme, the victims recruit victims and are therefore also perpetrators) are, for the most part, ethical, spiritually minded, responsible, and law abiding. In fact, in several cities, it was the members of the local police or sheriffs' department who were the participants!

We see six factors causing this widespread fraud to be perpetrated by members of communities upon one another.

1. The Scheme Appeals to Basic and Treasured American Values

The schemes tell you that the program is based upon biblical concepts of giving and receiving, or the scheme is a way to finally achieve your constitutional right to pursue happiness, that it is an exercise in personal freedom, or that it brings people together to mutually share and support one another, or participation is an exercise in good citizenship or a way for people to compensate for years of discrimination and therefore a personal right.

In the case of the women-oriented schemes, the organizers say the program is attuned to the special attributes of women for cooperation, mutual support, and harnessing the power of vision and commitment. They say it utilizes intuition and networking rather than linear, rational thinking and competition that characterize male-based income opportunities. And, they also tell women that the money to be gained is to be used, as women usually do, for good, not greed ­ for children's education, to support the family with perhaps some to give to the needy.

All of these stories sound good and true.

2. The Scheme Is Spread with Beguiling and Insidious Lies that Mislead and Entrap People

The lie most frequently accompanying the program is that the scheme is legal. In some areas, people were pointedly told that local authorities had already reviewed the scheme and given it a clean bill of legality and legitimacy. Some were told the state legislature had voted on it and approved it and that many legislators were themselves participating.

In addition to the lie about legality is the usual deception about how the scheme actually works. People are told that it is not pyramid and than everyone can and will win, that there are no losers. The mathematical contradictions are obscured. People are told to stay positive and not succumb to negative voices, analysts and doubters.

These lies are spread not by clever promoters but between friends, neighbors and relatives in which trust levels are highest.

3. Few People Understand the Mathematics of Exponential Expansion

Pyramid schemes are mathematical tricks upon the investor. The schemes are based upon a false premise of continuous expansion when, in reality, such expansion is quite limited. If the plan involves each person recruiting just two others, 1,2,4,8, 16, and so on, the entire earth's population would be consumed with investors by the 32nd level. Obviously, such a scheme is not "unlimited" or "infinite", as the promoters deceptively claim.

While the schemes operate, the people at the bottom will always represent the vast majority of all who have ever participated, regardless of how many actually do get their money out. So, whenever the scheme does collapse more than 90% will lose ­ guaranteed.

Pyramid schemes are illegal because they are designed so that nearly all will lose, but deceptively recruit people by claiming all have a chance to succeed. Most schemes say that all will recoup their money with a huge profit. This is a devastating and insidious lie that is spread from one person to the next.

4. The Mass Media have Conditioned Many People Today to Believe that Success and Wealth should Come Easily and Quickly.

We are told that wealth is achieved mainly from being in the right place at the right time, not from contributing something of value to society. Knowledge and hard wok have been devalued by lotteries, gambling, stock market speculation, Hollywood, sport stars, TV game shows, etc., all of which are legal and publicly sanctioned. So, many people now feel entitled to wealth and, if they are not successful, they feel cheated. The Scheme plays upon these feelings of entitlement. The Scheme's perpetrators do not have to say very much or do a lot of persuading. Many people are ready and willing to accept the scheme's premises about having found the solution to instant wealth because it fits in with so much else they see and hear today.

5. Consumerism, which Inundates the Media and our Communities, Equates Personal Success and Human Value with Money and the Things Money Can Buy.

Thus, many people feel chronically deprived, unfulfilled and invalidated. No matter how much they have, it is not enough. Insecurity is flamed by talk of a coming Recession, the collapse of Social Security or of being "downsized" or made obsolete by new technology. Many people have come to live beyond their means now and are strapped with credit card debt. They need more and they need it now. This is why the scheme has attracted many middle class or even upper income people who are seemingly well off.

6. The Government has not Clearly Defined Pyramid Schemes and has Allowed Businesses to Operate that Are also Based on Pyramid Expansion.

This has left many people confused, misled and unprotected. The multi-level marketing industry (MLM), with hundreds of companies in its ranks, has been allowed to operate for years, using exactly the same methods for spreading its sales schemes. Some prominent ones, such as SkyBiz and Equinox International, have been prosecuted as pyramid schemes. Others, such as NuSkin, Amway and Herbalife, were prosecuted for price fixing, making false or misleading claims about products or exaggerating income potential. But, on balance, the pyramid-based sales programs proliferate with impunity.

Why are those pyramid plans legal and the Gifting Clubs illegal? Because government has been lax in prosecuting the pyramid sales schemes, many who have participating in the Pyramid Gifting Schemes are petitioning to legalize their programs.

The gifting schemes usually involve no product but are said to be based on simply "giving" money. But, it is not the lack of product that is the cause of their illegality any more than "giving" money rather than "investing" it is. Rather, it is the mathematical certainty that the bottom levels -- representing more than 90% of all who join -- MUST lose, since the scheme cannot go on forever. This essential fraud applies to any pyramid scheme, whether it is involves handing over cash voluntarily or buying goods.

At present, some states have no laws against pyramids. Some have adopted weak or confusing laws. Others just do not enforce the laws they do have. Millions of people have been solicited to join MLMs. Little wonder that consumers are confused and become easy prey for pyramid perpetrators.

Stephen Barrett, M.D.

In 1986, Herbalife International, Inc., and its president Mark Hughes, agreed to pay $850,000 to settle charges by the California Attorney General that the company made false medical claims and engaged in an illegal pyramid-style marketing scheme. Herbalife has been selling its products through a multilevel marketing program in which the amount of money received by its distributors depended upon the amounts purchased by them and by those whom they recruit as distributors. The Attorney General's suit, filed in 1985, cited the following questionable claims made for Herbalife products:

* Slim and Trim Formulas comprise an effective weight loss program which can produce a typical weight loss of 10-29 excess pounds a month.
* Cell-U-Loss can attack "cellulite," eliminate inches, suppress appetite, improve circulation, and help many other conditions.
* Herbal-Aloe can aid digestion, "heal" and "cleanse the system."
* N.R.G. can increase energy, increase mental alertness, and provide a "nutritional lift." (The fact that caffeine is one of its active ingredients was not disclosed.)
* Lifeline aids the cardiovascular system.
* Schizandra Plus can combat damage that leads to premature aging.
* Tang Kuei is effective against hot flashes and can help the regularity of the menstrual system and relieve menstrual disorders.
* Flora-Fiber "scrubs and cleanses" the intestine with fiber and prevents disease.
* K-8 stops "induced depression" and "elevates your mood so you can handle stress."

The suit also charged:

* Early editions of the Herbalife Official Career Handbook made illegal claims that various herbal ingredients were effective against more than 70 diseases and conditions. Although most of these claims were deleted in subsequent editions of the handbook, the company had not replaced the original pages sent to distributors with the revised pages or asked these distributors to destroy them.
* Similar testimonial claims were made in company broadcasts over cable television.
* To attract new distributors, the TV programs and company magazine contained stories of individuals who made large amounts of money by building large networks of Herbalife distributors. These representations are misleading because there is no reasonable basis to assert that most people who become distributors will earn large sums.
* Although the company offered a "full warranty" on all of its products, customers who tried to invoke the warranty were often thwarted in their efforts by the defendants.

The court order settling the case, dated October 14, 1986, forbids representations without reasonable basis that:

* Herbalife products contain herbs that can curb appetite, burn off calories, or cleanse the system.
* Product users can lose weight without reducing caloric intake.
* Cell-U-Loss can eliminate "cellulite."
* Other products or their ingredients are effective as specified in the Attorney General's complaint.

The court ordered strict limits on testimonials and said that the caffeine content of N.R.G. should be disclosed in the career book and on the product's label. It also ordered Herbalife to change its marketing program so that distributors can profit only from retail sales and are discouraged from maintaining (and possibly becoming stuck with) large product inventories in order to qualify for bonuses.

The $850,000 penalty-payable over a five-year period-was assessed to reimburse the state for costs, attorneys' fees, expenses of investigation, and other expenses. Mark Hughes was ordered to post a $400,000 security deposit to cover possible default by the company.

On December 3, 1986, The Wall Street Journal reported that Herbalife had merged with a Utah-based shell corporation and plans to raise $14 million with a public stock offering. The company netted $7.6 million on sales of $115.7 million during the first half of 1986 and $12.4 million on $462.9 million of sales in 1985.

Source: www.mlmwatch.org

It is imperative that a distributor representing an MLM company have an excellent working knowledge of the product, company, compensation plan and the industry. Sharing one’s “product story” with a prospect is the foundation of MLM success. Using a product with the intent to evaluate its effectiveness and potentially build a business is an essential first step. No product story, no business.

Since MLM products, as a rule, are priced higher than what might be considered “retail” at a casual glance there needs to consideration of:

a. MLM products have to be of higher quality than retail products to get customers to “feel better.” Time after time, exposés on TV show that many items on a store shelf contain nothing but the equivalent of “sawdust.” To stay alive, MLM companies “generally” have to produce higher quality products. To determine which are most effective requires a product by product test by the MLM seller. Only by personal experience can an MLM Distributor “bond to a product.” This “bonding” is an essential element to aptly selling a product.

b. MLM nutritional products are “generally” more complex than store shelf products. That means there are more nutritionals in a capsule than those on a store shelf. Why MLM? Because a product on a store shelf can’t tell about a complex mixture in a small label on a bottle. The whole story about what the complex formula in an MLM liquid or capsule is, needs to be told verbally from one person to another.

MLM IS GOOD – ANOTHER REASON “SOCIAL PLACES”
Ray Oldenburg, now famous sociologist, wrote a book about 10 years ago called "The Great Good Place". In the book, he wrote about the critical importance to human society of informal public gathering places. Oldenburg divided our social life into three "places."
Our first place is the home, the second is work, the neighborhood bars, bowling alleys, and coffee shops are our collective "third places."

The third social “places” are becoming almost extinct. After World War II, according to Oldenburg, older neighborhoods have often lost their cafes, taverns and corner stores to the ravages of urban renewal and freeway expansion. Newer neighborhoods that developed under single-use zoning restrictions (houses only) made these critical third places illegal to operate.

"Life without community," Oldenburg wrote, "Has produced, for many, a life style consisting mainly of a home-to-work-and-back-again shuttle. Social well-being and psychological health depend upon community." Later he writes, What suburbia cries for is the means for people to gather easily, inexpensively and regularly, without expensive transportation.

This is why MLM Party Plans have grown. People like MLM opportunity meetings because they provide social well-being and psychological health. You meet in a group with a common cause that does not require extreme dedication. There is a common thread of communication, especially in the coffee shop after the meeting.

Source: www.mlmwatchdog.com

This page lists sources of advice, products, and services offered to network marketers. The bracketed dates indicate when we last checked the link. Its purpose is to illustrate how the MLM industry is organized. Listing on this page does not imply endorsement. (Indeed, we are skeptical of the entire industry). If you encounter any others, please send their web addresses to sbinfo@quackwatch.com.

General Information and News

• MLM.com [5/9/03]
• Network Marketing News [5/9/03]
• NPros.com [5/9/03]

Advice and Other Services

• America's MLM Consultants [11/4/03]
• MLM Bigmouth (brief reviews of MLM companies) [11/4/03]
• GreatestNetworker.com [11/4/03]
• InterNetWork Marketing [11/4/03]
• MarketWave [11/4/03]
• MLM911 [11/4/03]
• MLM Bigmouth: Includes company reviews [3/1/04]
• MLM Law [11/4/03]
• MLM Legal [11/4/03]
• MLM Millionaire Training Systems [11/4/03]
• MLM University [11/4/03]
• MLM Startup.com: Observations from several MLM proponents [11/4/03]
• Network Marketing Support Services [11/4/03]

Organizations

• Multilevel Marketing International Association [11/4/03]

Periodicals

• Cutting Edge Opportunities [11/4/03]
• Fortune Now [11/4/03]
• Greatest Networker [11/4/03]
• I'm In Newsletter [11/4/03]
• MLM Insider [11/4/03]
• MLM Network Connection [11/4/03]
• MLM Watchdog.com Magazine [11/4/03]
• MLM Woman [11/4/03]
• Money Maker's Monthly [3/18/03]
• Six-Figure Income [11/4/03]
• Upline Journal Archive [11/4/03]

A General Letter to the
Nikken Distributors in Holland

After much soul searching, Tineke and I have decided to put our Nikken activities on hold. Our decision is in itself nothing extraordinary. Hundreds, if not thousands of people before us have, ever since Nikken started their activities in 1997 in Holland, stopped their activities in the meantime. What is perhaps not so ordinary is the fact that we have decided to put our story on paper and to share this with others. We don’t do this out of disappointment or spite, but simply so that others may gain from our experience.

We have discovered that the promise that one can become financially independent with Nikken is no more than a myth. The 99.3% of the Nikken Distributors who are not financially successful at the moment (or who have not been successful in the past) will be able to ascertain that their lack of success was not because of them but because of Nikken’s marketing system. We are able to show that the chances to earn a "reasonable income" with Nikken is less than ONE PERCENT, let alone that one can become financially independent. Once again that is simply a myth.
Our Own Background

Tineke is a mother of three student sons of 16, 19 and 21. She became a Nikken Distributor in 2001. After 4 successful 21 clubs she eventually achieved the rank of Silver in November 2002. Gerard was during 20 years Chairman and Managing Director of a successful International Shipping Company in London. He became a Nikken Distributor at the end of 2002.

In February 2003 we met each other in a wonderful way. When we also discovered that we were both Nikken Distributors we regarded this as a special sign. Since that time Nikken became our joint passion and we tried to build up our business with a lot of enthusiasm. After 1-1/2 years of hard work we started to wonder why success kept eluding us. Were we really so incompetent? At the same time we were also amazed as to why so many of the other Nikken Distributors were similarly unsuccessful. We decided to find out why this was.
Searching for the Cause

The many American books written on the subject of MLM all indicate that the biggest problem in MLM is the constant attrition of people. It appears that many people who join a MLM organisation stop after a short while. We wondered what the cause of that might be. We could not accept that the thousands of Nikken Distributors who ceased their activities during the past eight years in Britain and the other European Countries were all lacking in talent.

On the face of it the sale of generally good quality products and the building up of a marketing organisation does not appear to be too difficult. Everyone with a bit of common sense, enthusiasm and perseverance must be able to do this. Why is it then that so few Distributors are able to create a reasonable income?

All MLM authors are unanimous in their opinion that if a Distributor is not successful that this is purely due to a lack of vision and perseverance. We doubted this viewpoint and we made a completely different assumption. We assumed that the lack of success was not because of the people, but because of the marketing system. If that assumption was correct, what was then the precise reason why people failed? We started to look at Nikken’s marketing methods very critically. After a while certain matters became clear to us.

We arrived at the following conclusions:

1. Nikken does not concern itself with sales but is predominantly interested in the recruitment of people
2. The customers are primarily the Distributors themselves
3. The Nikken products are not officially approved and also expensive. This combination means that the products are very difficult so sell to ordinary consumers.

Recruitment of People

It started to dawn on us that Nikken does not sell products but that their marketing methods are purely directed towards recruitment of people. The reason for that became now also clear to us.

People who join as a club member can be more easily influenced. Nikken is then in a position to tell Distributor members about their ‘great vision’. How they wish to improve the world, how they want to expand to 100 countries by the year 2010 and that they want to create 10.000 millionaires by that time and so forth.

Nikken’s marketing is further based on their 5 ‘Pillars of Health’ viz. ‘A Healthy Body’, ‘A Healthy Mind’, ‘A Healthy Family’, ‘A Healthy Society’ and ‘ Healthy Finances’. The background stories of each Pillar are so convincing that it appeals to almost everyone. Under ‘Healthy Finances’ the Business Opportunity is being presented as the most important Pillar of all.
The Method

When someone becomes interested in the Business Opportunity and signs up to become a Distributor, a carefully planned scenario begins.

One gets encouraged, preferably within 48 hours, to make a list of at least 100 names of family, friends and acquaintances. Under guidance of the Sponsor those people are then approached for an appointment. This meeting is carried out according to the special ‘ABC’ method with the Sponsor as leader. In this way everything possible is tried in order to convince the potential client to either buy something, to persuade the person to come to the next ‘Opportunity Meeting’ or (of course) to become a Distributor.

Thereafter the new Distributor is encouraged to go for the rank of Silver soonest possible by holding a series of 21 Clubs. A 21 Club means that 21 different people will, within a period of one week, be told the Nikken story and be given a free magnetic massage. Each of those meetings must last at least one hour. The purpose is to create a turnover of €5000.00. Failure to do so means that one misses out on a special financial reward and neither does one receive official recognition.
Compulsory Investments

In order to obtain the rank of Silver one has to have a turnover within one month of €20.000,00. One is also allowed to do this in four months but then the turnover has to be €25.000,00. Apart from this one must recruit minimum three people, each of which has to buy products for at least €1500,00. It is furthermore compulsory to follow a two day personal training course ‘Humans Being More’ and one has to purchase a Demo Pack and a Career Pack. Finally one must commit to purchase healthcare products for a fixed period of 12 months. All added together the compulsory investment comes to roughly €3200,00. It doesn’t stop there. Distributors are being pressurised to purchase extra products “in order to gain experience.” This means that most people invest at least €5000,00 of their own money.

Having achieved Silver is being presented as something very special. The truth is that people have worked very hard during sometimes very long days and weekends for very little income. We are certain that most Silvers invest more money in purchasing products than they earn in profits on sales or in commissions and bonus payments. 3
The Financial Reality

We estimate that only about 20% of the Silvers in Holland are active and we reckon that those earn about €800,00 to €1200,00 per month. The income of an active Gold we estimate at between €3000,00 and €4000,00 per month and a Platinum about €5000,00 to €7000,00 per month with perhaps an odd month where €10,000.00 or so may be reached. From this it will be clear that a ‘reasonable income’ only applies to the ranks of Gold and Platinum (and higher).

During our investigation we came across the following figures:
Number of Nikken Distributors in the Netherlands
April 2003

May 2004
Total Number
1929

2911
Silver
111

165
Gold
3

11
Platinum
7

8

After more than 7 years of Nikken activities in Holland, only 19 of 2911 people (a mere 0.7%) earned a "reasonable income." The figures show that whilst the total number of Distributors between April 2003 and May 2004 increased by 50.1%, the number of Distributors with a ‘reasonable income’ increased by only 0,.2%. This percentage would be even lower if we would apply the total number of people which have dropped out since 1997.

We suspect that the percentage of Distributors with a "reasonable income" in Holland is very similar to those in the other European countries.
Nikken’s Network Marketing System Is a Self-Propelled Pyramid That Moves Across Quicksand

The 0.7% of the Nikken Distributors in Holland who receive a ‘reasonable income’ owe this to the investments of the other 99.3% of Distributors. This proves that Nikken’s Network Marketing system is a self propelled pyramid which moves across quicksand. As long as new Distributors continue to be seduced to invest money, the pyramid keeps moving and the tiny top of the pyramid will continue to earn money. However, when the recruitment of new people were to stop, the pyramid would come to a halt and disappear into quicksand. This does not only apply to Nikken but applies equally to all MLM Companies, irrespective of the products they market.
The Nikken Company

Furthermore we have some doubts about Nikken itself. The story goes that in February 1998 Nikken received a Dun & Bradstreet rating of 5A1. We wonder whether Nikken would receive this rating today. It is a well known fact that due to market circumstances turnover and profits can change rapidly. Nikken gives us the impression that they are a closed and a somewhat mysterious company which doesn’t disclose anything about their turnover and business strategy. The only thing we ever read about their turnover was in their magazine of January 2004 when they talked about 1,5 billion dollar. Was that the t/o for 2003 and what has the t/o been for the other years? Who are actually the shareholders (stockholders) of Nikken? How big are the cash reserves they have built up since 1975? Those must be substantial, mustn’t they?

Those are a number of things we reckon that a Distributor should know so that he or she can arrive at a considered decision whether Nikken is the right company for them. In "Nikken shows the way" in their magazine of November 2003 Distributors are described as "business partners." Why should business partners not be entitled to this kind of information?

Another big disadvantage of a MLM company such as Nikken is that they hold all the power. Apart from the fact that they can alter their prices and assortment of products at any moment, they can remove a Distributor from their computer system without any reason. One has no protection nor any rights and cannot therefore fight such a decision.

Nikken arbitrarily decides what the prices of their products should be. Not only that. They have created an ingenious system whereby each product is allocated Qualification Points (in order to reach a certain rank) and Commission Volume (CV) over which commissions and bonuses are being calculated. We have established that in Europe Nikken reduces the CV value by 10%, 25% and in some cases even 50% (Pi-Mag Watersystem, Optimiser, Cardio-Strides, Greenzymes etc.). Nikken does this in order to reduce the amount which they have to pay out in commissions and bonuses. In America the CV is equal to the wholesale price so why not in Europe? Is this the reason why Distributors on Nikken’s website can see what their turnover is in Qualification Points but not what their CV is? Has this deliberately been done so that Distributors cannot check whether their commissions and bonuses have been calculated correctly?

Finally we are of the opinion that, since Nikken receives their money in Europe mainly in Euro’s and given the fact that the Euro has shown an increase of 29% versus the Dollar during the past two years, the CV should have been increased by 20% to 25% instead of decreased.
Final Conclusion

According to Nikken, they were successful in Japan and the Far East between 1975 and 1989. Apparently this was on the basis of using a network of traditional agents. In 1989 Nikken decided to expand to the USA and then chose to change to the MLM system.

The psychology of their marketing plan is so subtle and sophisticated that it is frightening. Everything is deliberately aimed at the goodness of human beings. Their deepest emotions are being stirred. Nikken talks about a better world, a cleaner environment, a ‘new economy’ in which everyone has an equal and honest chance to become financially independent. Moreover Distributors are being told that they will have more time to spend with their family, that they will be able to do more for society etc. etc. Who wouldn’t get attracted by such ideals?

However, our investigation shows a completely different picture. People are led to believe that as long as they believe in the vision of Nikken, that if they are willing to change, that if they develop a tougher mental attitude and show a great persistence that they can become financially independent. Alas, Nikken’s Business Opportunity is no more than a mirage. From afar it looks attractive, but as one gets close it evaporates.

As already mentioned Nikken’s Marketing system is particularly geared up to push people to the rank of Silver. Once attained one discovers that this rank does not mean very much. The arsenal of family, friends and acquaintances has meantime been exhausted, trying to interest new people outside one’s own circle is harder than thought and the products are difficult to sell. For a while Silvers continue to do their utmost but in the end most of them cease their activities, believing that they are to blame for having failed.

It is clear that the constant recruitment of new people and trying to get them to become Silver is where Nikken’s turnover comes from. This is what keeps Nikken alive. This is the growth which the pyramid needs in order to keep moving. Once recruitment stops Nikken will be finished.

Many thousands of people in Holland and in Europe are being misled by various MLM Companies in a similar way. They get lured with the “American Dream” of financial freedom, but only the owners and shareholders of a MLM organisation together with a minute number of their top Distributors become wealthy. For more than 99% of the people this “American Dream” becomes a “European Nightmare”.
Our Challenge

In the article ‘Healthy Millionaires’ of Nikken’s magazine of August 2004 Nikken’s President Mr. Kendall Cho confirms that financial freedom is being used as a bait and that the key is recruitment of people.

We say that his ‘Vision 2010’ is absolute nonsense and we would like to ask him the following questions:

1. How many Distributors are there worldwide and how many of those are Millionaires?
2. How many Distributors are there in each of the 15 European Nikken countries and how many of those have the ranks of Silver, Gold, Platinum, Diamond, Royal Diamond and Royal Ambassador?
3. What is the average monthly amount that Nikken pays to the Silver, Gold and Platinum ranked people?

Only an honest answer to those questions will make it clear how realistic or unrealistic the chances are which Nikken offers on what Mr. Cho calls: ‘a life-changing business opportunity which will make your dreams come true’.
Finally

We are aware that we may cause quite a stir with this letter. Especially with those who have been connected with Nikken for some time. We can only say that is has been difficult for us too having had to face this reality. Or as Tineke said ‘We felt as if we were married with Nikken’. We wished that it were different but we cannot deny these facts. If you have not been successful financially than you now know that this was not due to any fault of yours. The people who are Gold and Platinum will have to consider whether enticing people with beautiful but unattainable promises agrees with their own integrity or not.
Postscript (July 2006)

Nikken did not officially acknowledge seeing our letter, but they responded by terminating our distributorship! We received quite a bit of written abuse by several of the leading Dutch Nikken distributors (as one would expect) but no one has been able to refute any of our claims. Probably because they cannot. Figures don't lie.

The authors can be contacted by e-mail at freeflow@chello.nl or reached by telephone in Rotterdam at (31) 10-418 98 68.

On September 27, 2006 Robert L. FitzPatrick delivered a one-hour presentation at the 7th Annual Fraud Conference of the Association of Certified Fraud Specialists in San Francisco. ACFS is a professional organization of attorneys, private investigators, forensic accountants, corporate loss management and audit managers and federal and state regulators. The following essay is based on his presentation and on meetings and conversations with the conference attendees

The 7th Annual Fraud Conference of ACFS offered a stark picture of the status of fraud in American and globally. The theft of data and identities has grown into a worldwide industry with document forgers, phishers, hackers, and fake credit card makers. Globalization of business and digitization of data have dramatically increased fraud opportunities. A toxic combination of low paid, disaffected workers handling increasingly valuable data on millions of private citizens results in a growing incidence of fraud. Justifying fraud against huge and insensitive corporations is increasingly easy for otherwise honest people.

Multi-level marketing is an integral part of this new culture of fraud. The chances of being defrauded by an MLM are far greater than having your identity stolen, yet the professionals in fraud prevention largely overlook the insidious fraud of pyramid selling schemes. At present, our Federal Trade Commission, whose recent chairman was an attorney representing the Amway Corporation, has turned a blind eye to pyramid selling schemes in the marketplace. The FTC has prosecuted about 20 pyramid selling schemes and has developed well defined criteria of distinguishing pyramid scams from legitimate direct selling companies. These criteria primarily concern the level of retail selling carried out by the companies’ sales agents as opposed to an emphasis on recruiting an ever-expanding number of “sales” agents.

But since 2000, the FTC has effectively declared a moratorium on investigating and prosecuting pyramid selling scams. With the FTC not enforcing the law, few state Attorney General offices will take on these national or international schemes. Predictably the number of “non-retailing” recruitment scams has multiplied. Safe from prosecution in the US, many now are aggressively setting up operations in poorer countries, claiming they are the best that America has to offer in “free enterprise” and “business ownership” opportunities.

Pyramid Selling Scams vs. Direct Selling

Pyramid selling scams are actually much closer to the classic definition of fraud than identity theft, which is now more akin to common thievery. Identity data is a new commodity and has much greater value than many other tangible items that were historically targets of theft. In many instances data theft is little more than a new form of shoplifting or burglary. And the manipulators of this stolen data are analogous to traditional fencers of stolen merchandise.

MLM, however, employs sophisticated deception and diversion. It seeks to operate openly in the legitimate marketplace, posing as “direct selling.” But the hallmark of the scam is the absence of direct selling. Virtually none of the products is ever sold to retail customers. Instead, products are sold as part of a business propositions to new “distributors.” Each “distributor’s” investment constitutes the “consideration” paid for the right to recruit other investors. And the commissions they receive are rewards derived directly from the investments of new recruits. The only way to gain a profit is to enroll another investor. The products that the schemes sell serve to disguise the pyramid structure and to launder the classic pyramid scheme transactions.

Far from a direct selling company operating in an open market, the MLM is a closed system with fixed prices and a built-in ratio of losers to winners. 99% will always lose in this closed system. This is known and understood by the perpetrators from the day the scheme opens its doors. Yet, they will promote it as the “greatest opportunity in the world” and the “chance of a lifetime.”

In the disguise of “direct selling” companies that offer cosmetics, soap, long distance phone services or vitamins and food supplements, the MLM appears to many people as a business much like any other. In reality, as practiced by the vast majority of MLM companies, MLM is a classic “sting” operation. The victims not only give over their own money to the scheme but are persuaded also to aid in luring others, usually their own friends and family.

MLMs Designed to Inflict Financial Harm

The MLM business model is elegantly designed to inflict financial harm on thousands of people and to enrich only the top promoters of the scheme. The model consists of a pyramid hierarchy in which top positions are gained though “endless chain” recruiting.

Profitable income is available only to those who recruit large numbers below them. Basic math shows that this could only be achieved by a fraction of one percent. The income plan is a complicated formula of commissions that richly reward those at the very top while giving little to those at the bottom, a reverse of the commission formula used by legitimate direct selling companies.

Surrounding the inherently fraudulent business model is a web of deceptions and diversions to prevent the consumers from grasping the true nature of the scam. Religion or religious references are regularly employed as diversions or to stave off suspicion. Victims are told to focus on their goals and dreams rather than doing due diligence. Family and social networks s are utilized to spread the scheme in which trust and even love are leveraged and commercialized. Some people have noted the classic techniques of brain washing and cult practices in MLM operations. These include strict hierarchies, authoritarianism, censorships, restrictions on relationships, constant bombardment with propaganda, and a continuous breakdown of the individual in favor of the “team.”

Most important, the scheme convinces new recruits that “success is up to you” and “if you fail, it will only be your own fault.” The “system” is presented as fool proof if followed precisely. All failures – and 99% will always fail – are falsely attributed to weakness, lack of confidence or ambition or “negativity” on the part of the individuals. Hence the scam is seldom examined even after the victim quits the scam. 50-75% quit within one year and 95% will have quit within several years. These countless victims bear their losses in silence and shame.

Facing the prospect of shameful failure, many can be lured into further losses by “top gun” promoters who sell proprietary “success tools” to the new recruits. Often the sales of these items are carried out with a parallel system of pyramid rewards, constituting a pyramid within the pyramid and inflicting additional losses on the recruits.

The Endless Chain, a Fraudulent Proposition

At the heart of all these scams is the promise of income derived from the “endless chain.” This is a fraudulent proposition in the same league with the “bait and switch” and the stolen identity. It is a mirage, a delusion, a lie. In the past, the endless chain proposition was viewed as a per se fraud and was routinely prosecuted. Now, in the guise of “direct selling” companies that employ PR companies, top law firms and make large political contributions, endless chain recruitment schemes are currently treated as legitimate. Most enjoy full immunity from prosecution.

The MLM fraud is carried out on a vast scale. Even the lesser known MLM schemes can enroll hundreds of thousands over the course of several years. They operate globally by adapting the false promises to each country and using local perpetrators who are positioned at the “top” in their respective territories.

Just as the public is ill-equipped or prepared for the risks and perils of identity theft, most people are peculiarly vulnerable to MLM fraud. Its promises of financial freedom, early retirement, low initial investment and its claims that large numbers of people earn significant income find an eager audience. High levels of credit card debt, job insecurity, rising costs of healthcare and education, globalization and the pressure of new technology weigh heavily on everyone. The offer of the “world’s greatest opportunity” and a “new system” resonate strongly.

Lack of Law Enforcement by FTC Equates to Government Endorsement of Fraud

But as seductive as the claims are and as vulnerable as most people are, other factors are equally important in enabling MLM scams to impoverish millions of people each year. These other factors involve law enforcement, government regulation and consumer protection.

1. MLMs are not required to report, monitor or disclose retail activity, the key factor that delineates legitimate direct selling from pyramid recruitment scams. Without any monitoring requirement, the fiction of “direct selling” can be maintained by unscrupulous recruitment scams.

2. MLMs can solicit investments and sell distributorships without informing the investors about historical failure rates, average losses, costs or payout distribution. The fiction of “individual” failure can therefore be maintained. Many people who “fail” are left with the haunting thought that they are “losers.” They do not understand that virtually everyone loses in the MLM system. This is the way the scheme is designed and the so called winners have only gained the money of the losers through deception.

3. Without retail sales or any other financial data disclosures, pyramid schemes can operate openly until the government “proves” fraud, a costly and time-consuming endeavor for regulatory agencies facing staff cut-backs and other priorities.

4. Huge campaign contributions have provided political protection to the largest pyramid selling schemes. This protection serves as a legal umbrella for all types of pyramid schemes to flourish without prosecution. Immunity for some becomes impunity for most. Lack of law enforcement becomes government endorsement.

MLM Fraud, a Part of Everyday Life Now

The deceptive solicitations of MLM promoters are now a staple of daily life. Who has not been solicited? Who has not had a close friend of relative involved, at least briefly, in one of these schemes?

The losses to consumers are in the tens of billions each year. Perhaps even more costly is the damage to personal, family and community life. Pyramid Scheme Alert receives reports each week of divorces, bankruptcies, loss of credit, repossessions, disruption of family or friendships, church congregations divided, and anger and retribution in small towns or in the workplace – all due to the insidious spread of MLM recruitment fraud.

Public education is crucial, yes, but the public cannot be expected to avoid these calculated, well funded and sophisticated frauds without support. Fraud specialists in government and in Corporate America are critical to ending the current epidemic of pyramid selling scams.

Fraud Specialists are needed to uncover and reveal the fraud behind the disguises;
to confront the fraud when it insinuates itself at the table of legitimate power; to hold legislators accountable for enacting and enforcing laws against pyramid fraud; and to uphold the values of fair and transparent business that pyramid scheme fraud negates with its predatory and deceptive practices.

Source: www.pyramidschemealert.org

by Robert L. FitzPatrick

On a recent appearance on the NBC Today show and then on a local call-in radio show at KOMA in Oklahoma City three days later, the same question was raised, yet again, about the "meaning" of pyramid schemes that are sweeping America and Canada. The pyramid schemes include community-based scams that pose as private clubs or semi-religious movements and the product-based pyramid schemes that pose as "direct selling" or "multi-level marketing" companies.

The community-based schemes have recently broken out in more than 30 states. Hundreds of thousands of women have joined the latest version of the old-fashioned pyramid scheme, this time called "Women Helping Women." Authorities in several states have attracted national publicity as they arrested leaders and sought to break up the schemes. The product-based schemes are multiplying and operating ever more brazenly. They cause billions in losses to millions of people, but they are seldom investigated or prosecuted by state and federal regulators. Increasingly, these schemes are being accepted as legitimate "businesses."

This puzzling question of what the proliferation of these schemes says about us as a people and our country goes beyond the other more specific inquiries I typically get from the media and consumers regarding the legality or the details of operation of these frauds.

Lax enforcement of pyramid laws and political protection gained with campaign contributions offer some explanation for the pyramids' spread. Hard times, rising consumer debt, downsizing and general job insecurity undoubtedly account for some of the motives of participants. And clever disguises of the pyramids as "direct selling" businesses, gifting clubs and voluntary investment groups are also valid factors for their continuation.

But these answers are still unsatisfying. Millions of Americans could not all be so naïve. Government regulators are not all so corrupted or inept. And the tens of thousands in each city who join the scams are not so economically distressed that they must forsake conventional ethics and values just to survive.

Something more is at work in America that contributes to this massive breakdown in ethics, values, personal responsibility and common sense.

Enron for the Common Man

Why would so many gleefully join programs that fleece 90% to 99% of all participants ­ many of them friends, relatives and neighbors? And then, when the police or the state Attorney General informs them that the scheme is illegal and harmful to so many other people, why would they deny its harm and defy the government, as so many do? Some involved in the schemes have actually sued the police for enforcing the laws against pyramid fraud. In Texas, a large group of women hired lobbyists and tried to pass a state law that would make the most blatant of all pyramid schemes, the so-called gifting clubs, legal. A national business association is seeking to get state and federal laws changed to make legal what the FTC, most state laws and several federal court rulings now treat as illegal pyramid sales schemes.

Pyramid participants will never be accurately researched. Understanding this phenomenon or venturing a useful explanation requires intuition and analysis backed up with direct experience with pyramids. Having personally participated in a pyramid scheme, researched and written a book on the subject, appeared on many news shows, testified in court and corresponded or talked personally with several thousand people directly involved in these schemes, I have formed a view that is disturbing and challenging and tends to shift the focus from understanding "them" to looking at ourselves.

I see pyramid schemes as part of much wider trends and changes that are occurring in our culture and in the hearts and minds of most people in America. The pyramid scheme is the purest and starkest example of a larger shift in social and business values.

I also see the pyramids and the values they represent driving and influencing mainstream business practices. If the executives at Enron represent a set of corrupt values and practices that are more prevalent than we realized at the top end of our economy, the participants in the pyramid schemes can be seen as representing those very same values and practices at the bottom end where most of us live.

I came to this view after seeing that the basic elements and characteristics of the pyramid scheme are showing up in mainstream business, government and community life.

Anatomy of the Pyramid Scheme

There are at least three essential elements of the pyramid model:

1. Positioning: Profiting from being in the right place at the right time in contrast to gaining an equitable return for having delivered value or performed a useful service. The pyramid's ROI is akin to that of the speculator's and the gambler's.

2. Recruiting/enrolling/promoting: Seeking other people's investments as the source of your income, rather than from a profit based on creating or delivering value. Profit in the pyramid is not the by-product of labor, service or added value. It is gained at what is normally viewed as the start of a transaction, when investments are first made toward funding an enterprise. The pyramid diverts funds from real enterprise in the manner of embezzlement.

3. Leveraging: Multiplying your profits based on growth and expansion of new investors. The pyramid scheme model requires continuous leveraging through continuously expanding enrollments of investors. This is, of course, mathematically impossible. It therefore cannot deliver on its promises to any but a few, usually those who join at the launching of the scheme. For this reason, above all others, a pyramid scheme is an inherent fraud.
The pyramid scheme differs from the Ponzi scheme in that it requires each investor to enroll others. Each victim is induced to also become a perpetrator. The pyramid scheme multiplies its impact exponentially in the population. In addition to causing largescale financial harm the scheme spreads corruption, debases personal and social relationships and destroys informal networks that were based on trust.

Character of the Pyramid Scheme

To the components of positioning, recruiting and leveraging, we can add a few related characteristics in order to get a clearer picture.

1) Pyramid schemes are about, quick, short-term profit. They are the quintessential get-rich-quick scam. Leveraging a continuously growing base of new investors can produce enormous revenue to the perpetrators at the top. No need to wait for profits from offering a real service or product to real consumers, the pyramid just siphons off investment funds and transfers them to those "positioned" at or near the top. A long-term customer base is also not required since a steady flow of new buyers can be churned annually by attaching the promises of fast wealth to the product.

2) Pyramid schemes require an unconscionable lack of responsibility toward others. Profit is gained from someone else's loss. Value is not exchanged. Even when products are involved, the scheme is not a real business. "Profit" requires enrolling an endless chain of new salespersons and falsely promising them the same opportunity. In such a program, the vast majority must always be at the bottom where they can't earn a profit because they have no 'downline.' Pyramid sales schemes often couch this predatory behavior as "American individualism" and "personal responsibility", as if being responsible for yourself exempts you from responsibility to others and excuses deception. The values of the pyramid are those of the scavenger.

3) Pyramids are inherently deceptive. Deception in the pyramid involves lying to others and lying to oneself. In the pyramid sales schemes, for example, the real business is not vitamins or water filters, but recruiting other investor/salespeople. Almost no one actually makes money in a program hyped as the "opportunity of a lifetime." The speakers on the stage are not making the incomes they claim they are. This is not a program of "winners" at all. Indeed, 50-70% will quit the program in the first year and 99.9% actually lose money!

In the "gifting" schemes, for example, no one is really giving "gifts." They are buying positions in a scam that promises an 800% return. The women in the "women helping women" gifting schemes do not tell their friends that 90% will lose in the scheme, even if they realize this. If they don't realize this, it is because, to some extent, they willfully chose not to look at the facts. The scheme is not about "helping" others but about helping oneself at the direct expense of others. Like an onion, as each layer is peeled away, yet another level of deception and manipulation is revealed.

4) Ultimately, pyramid schemes steal. They are a form of organized thievery carried out within a system of money transfers in which everyone, to some extent, is seeking to steal from someone else. A kind of looters' mentality takes hold to justify this behavior. If everyone is doing it, why can't I? And, it is okay to steal from those who are trying to do the same thing?

5) And, finally, no one who studies pyramid schemes can fail to notice that pyramid schemes are characterized by a kind of lapse in common sense and normal intelligence. Denial and delusion, perhaps associated with desperation that is now being let loose with visions of quick riches, are in full swing. Well educated women will insist that a pyramid - in which each person gets the money paid in by eight others, and those eight will do the same with the process continuing indefinitely - is completely sustainable forever. They adamantly deny its inevitable collapse. They refuse to do the math. Nor, will they admit that 90% must, always, and by design, lose.

Multi-level marketing zealots, who have lost thousands already, will insist the program is valid and that "success" is just around the corner. They will reject any analysis or disclosure of actual financial results of all distributors as just "negativity". They will assert that all those who lose ­ even if it's 99.9% - cause the losses themselves due to laziness, lack of character or refusal to learn the "secrets" of success.

Extraordinary Popular Delusions in Everyday Life

With the three components and the five related characteristics listed above as guidelines, where else can we see this syndrome in operation in society that would put the pyramid in a larger context and help us understand its "meaning"?

Here is a short list that reveals that the pyramid scheme is part of a much larger system of values and practices that are gathering momentum and prominence in our society. Far from an aberration, the pyramid scheme is very much part of the "mainstream" or, more accurately, the mainstream increasingly resembles the pyramid scheme.

* The entire NASDAQ bubble operated on the pyramid model, characterized by the infamous "pump and dump stock schemes." Stock value skyrocketed based purely on hype and manipulation by the promoters. Some of the stocks had no intrinsic value at all; just a good story, sufficient to attract many other investors, thereby boosting the stock value for those that "got in early." "Demand" for the stocks was created with deception. As in the pyramid model, the number of investors ultimately turned out to be limited and when that limit was reached, decline was rapid and devastating to those who got in late, which constituted the vast majority.

The pump and dump stock schemes used to be limited to sleazy, disreputable "penny stock" brokers who hyped "shell" companies. But in recent years, we learned that the largest and most famous Wall Street stock companies were doing it in collusion with esteemed Fortune 500 corporations. The fraud was further compounded by the nation's most revered and trusted accounting firms that cooked the books (they were induced to do this with "consulting" contracts). Then, reputable, "independent" stock analysts, featured on major networks and newspapers were paid off to hype the stock and recommend a "buy" to all their clients.

* Insider trading, which is certainly more prevalent than Martha Stewart's little case, fits the pyramid model. Profit is gained by being in the right place - on the "inside." The level of investments of others determines value. If they pull out, the value is lost. Insiders leverage their position to get in and out at the right times. When they sell their stock high, just before it crashes, the ones they sell the stock to suffer the loss. No responsibility for those losses is assumed. Manipulating inside information is itself a form of deception toward those on the "outside."

* Exorbitant CEO pay that is allegedly related to stock performance fits the model. In 1980, CEOs of large companies on average earned 45 times as much as non-supervisory workers. By 2000, CEO pay had ballooned to 458 times as much as ordinary workers' at their companies. Again, the massive payoff is based not on actual contribution or performance, but by being properly positioned. Income can be increased directly, out of all proportion, at the expense of other stakeholders and pay raises can be tied to stock performance that can be manipulated by promotions and hype, not delivery of real value. Recent studies have shown a direct relationship between the highest CEO pay and the companies whose stock has lost the most value during the recent crash.

* Stock speculation in general fits the description (including day-trading), which, let's face it, included millions of us in the late 90's. We all wanted a piece of the "action." What action? Not sales growth or increases in profits or productivity from companies that paid dividends. No, we wanted to quickly earn huge capital gains on the rise in stock value that was tied to speculation by others. The more people who bought in, the higher the price went. If you could get positioned at the right time with the right stock, catch the wave, as they say, you could be set for life. It was all a matter of being at the right place at the right time, when many other people behind you were also investing and then letting their investments leverage the value of yours to go higher and higher.

* The widespread use of stock option pay plans for employees and top management has many of the pyramid scheme elements. Companies figured out how to pay employees without using actual money earned from their labor. They were given "options," stock that could be exercised at a future date at a specified price. By paying with options rather than money, the company did not have to record the payment as a cost, but could use the options as tax deductions. This artificially drove up profits, which made the options more valuable and set the stage for the next round of options based on yet a higher price than the one before. The rising stock value also lured in more outside investors, which drove the stock still higher. New investors ultimately determined the value of the payment to employees, not by his/her contribution. These were not "wages." When the bubble burst, millions of employees were left with worthless options. And, they had sacrificed fair pay for their labors in order to get in on the "options." They "got in" last. Upper management could leverage the system best, since they could manipulate the stock value as "insiders." Few executives were left with worthless options. They knew when to "get out."

* The reliance of millions of people (just about all of us) on (hoped for) investment portfolio or real estate value growth for retirement rather than on continuous savings. It may seem incredible to us today, but past generations thought that they had to save money each and every week of their entire lives for retirement. They did without new cars, vacations, new clothing or new furniture. They wouldn't go to restaurants. They kept their overhead low. From these frugal measures, they were able to put money aside in "savings" accounts. Slowly, gradually, the retirement 'nest egg' grew and was there for them when they got older. They did earn interest, but the rates were minimal. The main factor for their retirement security was setting aside money each and every month and consciously limiting spending. They believed they had to live below their means.
Today, this behavior is regarded as old fashioned or even harmful to the "GDP." We are encouraged to spend, spend, spend. Even during a war, we are told that we should contribute to the war effort by going to the malls and buying things. We are also encouraged to take on more debt. Low interest rates are offered on housing which enables more people to buy larger homes. The interest rates mean lower monthly payments but they also tend to increase the total debt load.

How will we take care of ourselves at retirement? How will we ever pay off our huge real estate debt and credit card debt (now totalling more than $9,000 per person)? We believe our nest egg will be in stocks and real estate that we acquired along the way. It will have "grown" on its own at such a rate that makes frugality unnecessary. Will it grow forever? We believe it will. We must believe this because if it doesn't, what will we do?
We believe our real estate will get more and more valuable which is to say we are banking on there being many more people behind us able and willing to pay more, much more, than we did. We are leveraging the future buyers. (There will have to be more people with more money coming behind us in order to create "demand" and higher prices for our houses.) Stocks and real estate will always go up so there is no need, we believe, to "do without." The key is to gain a position by buying in. The losers are those who can't or don't buy a position. So, all you have to do is get in early, and let the stocks and real estate carry you to a happy and secure retirement.

* Government deficits must be included in this list. In a deficit program, the government borrows billions and billions and spends it on our behalf - now. It even borrows to pay the interest on what it had previously borrowed. We get tax breaks, a larger military and other programs we all benefit from. We are told this will "stimulate" the economy that will grow so large that "surpluses" will occur later on and then the money will be paid back, plus the billions in interest that will have accrued. Will this actually happen? We don't really know, but we borrow and spend it anyway. Deception, delusion? Not really because if the deficits are not paid, we won't be the ones to suffer. We can pass the debt on to the next generation, our "downline" so to speak. Their losses in the form of reduced services, higher taxes or inflation will have been our gain.

* Lotteries too must be added to the list of pyramid dreams. But, the lotteries are only games and the odds of success are advertised? Well, sort of. In Florida, for example, the odds of winning are 1 in 14 million. This is like placing all the phone books of every town in the state in a room and then bringing a blindfolded Florida resident into that room. For a few dollars, the resident can get the chance to blindly open a phone book at random and put his finger randomly on a random page. The blindfold is then taken off to see if he picked his very own phonebook listing. That is the real chance of winning. Yet, millions each week pay sometimes hundreds of dollars, for that chance. And when a winner is selected, he receives the money that the others paid in. No other value is created. The state now depends on this delusionary program to pay for vital public services. Will people always support the lottery? We hope so. It is replacing taxes that used to be levied on purchases, labor or on assets, that is, on today's reality not tomorrow's dreams. More and more of us refuse to pay the old type of taxes that comes right out of today's earnings. We prefer that the government tax us by offering a hope and dream of becoming millionaires. Like those cheering at the multi-level marketing rallies, we believe we can all be winners, even if the game requires that virtually all of us lose.

* I now place at the end of this list the multi-level marketing "industry", a type of business that meets each and every criterion of the pyramid scheme syndrome ­ positioning, endless chain recruiting, continuous leveraging, the hope of getting rich quick, inherent deception, delusion, denial, and unconscionable lack of responsibility to others. Nearly 5 million Americans join every year. A few of the companies in this industry are prosecuted each year. Some are sued by victims. The FTC generally warns against participating in them, but couches the warning as a responsibility of the consumer to be vigilant, not the FTC's to investigate or prosecute. Whether multi-level marketing companies are legal or not, the fact remains that 99% of investors lose in them. Just 25 years ago, the FTC believed that businesses based on endless chain recruiting are inherently deceptive and met the definition of a pyramid scheme. Today, this industry sits at the table with mainstrean business. The MLM industry's top leaders, the co-founder of Amway and his son, have each served as chairman of the US Chamber of Commerce - a global ambassador and representative of American business. And a new bill has been introduced in Congress that will erase the criteria that the FTC has used to prosecute such schemes. The proposed new law changes the definition of pyramid schemes so that multi-level marketing companies like Amway will never again be accused of deception or fraud.

To understand the "meaning" of classic pyramid schemes and their unfortunate participants we must recognize that they share values, beliefs and practices with the nation's top securities firm, Fortune 500 companies, high flying technology firms, famous and revered CEOs, state and federal budget planners, with typical consumers, homeowners and IRA investors, lottery players, and millions of MLMers trying to enroll their family and friends into their "downlines." In short, all of us, to some extent, extol and support the pyramid mentality and its delusional behavior.

That pyramid scheme participants are part of mainstream America does not in any way lessen the personal and social harm, the financial losses or the corrupting influence. The damage grows proportionately. The losses accumulate exponentially. Moreover, in an era when millions are losing jobs to globalization and new technology, the legalization of business practices or programs designed to fleece unwitting and sometimes desperate consumers of their savings will have long term negative effects.

From the Enron scandal we have learned that specious and predatory business practices can hide behind a public façade of financial integrity, religious piety and business innovation. Pyramid schemes are camouflaged in the language of patriotism, entrepreneurship, community, personal fulfillment, marketing "trends", religion, personal freedom, or fun and games.

Beyond deception, delusion and desperation, the most important "meaning" of pyramid schemes may be their corruption of the core values and loftiest aspirations of the American people.

Why Nearly Everyone Loses Money in MLM, but So Many Keep Trying

What few people realize about "duplication" in MLM sales schemes (Recruiting other distributors who recruit other distributors, who recruit others, and so on) is that it places the vast majority of enrollees always at the bottom levels. This is where nearly all the members permanently are who pay the money that goes to the top.

The doubling of the penny each day for just 30 days illustrates the mathematical trick that MLM companies perpetrate on the new recruits

A penny doubled every day for 30 days amounts to over $5 million. However, note that it takes 25 days (levels) before it amounts to just one hundred thousand dollars. Then, in the last 5 days, it soars to over 5 million.

Such is the pattern of "duplication." Like MLM, most of the money is at the end of the chain. The source of that money is the newest enrollees who make up the vast majority of the entire chain.

The big numbers are at the deepest level of the "downline", but many levels must be assembled and maintained long before the numbers starting adding up. In MLM, only a few can ever achieve this. This is mathematically predetermined from the start by the MLM pay plan.

The trick of the trade is to cover up this reality and to guilefully convince each and every enrollee that he/she can succeed. Recruits are told that the program is a formula for wealth, even though it is mathematically impossible for any but a few to succeed.

The way the mathematical trick works itself out is in the pattern of dropouts. Facing the mathematical impossibility of building a dowline of thousands of new people, the people entering at the bottom levels soon quit or the ones they have recently enrolled quit. Effectively the pyramid is continually collapsing in the lower ranks and rebuilding when new hopefuls are found to replace the recent "losers." In this way, MLMs don't totally saturate areas with members quickly because most people quit within a year. All MLMs experience a 50-90% annual dropout rate.

But during the brief time that people in the bottom levels pursue their futile quest, they are also continuously paying money to the MLM for products and training as well as incurring other business expenses -- and thereby supplying money to those in the top ranks.

On each "sale" or enrollment, the MLM pay plans specify that the highest percentage of bonus money goes to the top ranks. The doomed efforts of the new recruits pump nearly all of the bonus payments to those few people in the top ranks. The bottom levels, where the vast majority of members are, become a revolving door with new people cycling in and out every month.

"Success" of the few at the top is based on the losses of nearly all they enroll. Also, it involves continuous recruiting in order to keep replacing those "losers."

Source: http://www.falseprofits.com/

Highlight: Hundreds of thousands of women in the US and the UK have been lured into illegal pyramid schemes called "Women Empowering Women", "The Original Dinner Party", "Gifting Clubs" and other similar names. 88% of all who participate will lose their money, yet all are told that everyone "wins." See how the scheme works.

New Wrappings for Old "Gift"

An old style pyramid scheme is moving across the country like a locust plague. It has been renamed and dressed up to lure new types of victims, but underneath the gift-wrappings is a well-known scam with its inevitable, sad consequences.

It is variously called "Gifting Club," "Women Empowering Women," "Dinner Party," "Circle of Friends, " Women's Empowerment Network," "Gifting Circle," among other such pretentious and beguiling titles. The scheme may involve "giving" from $500 to $5000 or more. It may have four or more levels and require recruiting one, two or as many as eight more participants.

Two indisputable facts need to be understood by consumers.

1. The scheme, by whatever name it goes by, is illegal
2. Inevitably, the great majority of all participants will lose their money.

These two facts must be highlighted at the start because a hallmark of the scheme is for organizers to tell people it is legal and that everyone can win. Both are flagrant lies. In some states, participants are boldly told that the scheme has been specially approved and cleared for operation by the state legislature or state attorney general. These are extravagant, entrapping lies.

As to the legality, if you are in doubt about this, the end of this essay offers a link to a list of articles and press releases from Attorney General Offices, police departments, Better Business Bureaus, major newspapers, and State Departments of Commerce in Wisconsin, Texas, Virginia, West Virginia, Maine, Illinois, California, Kansas, Minnesota and other states. This is just a samping of reports and warnings. All say the same thing. The scheme is illegal and the great majority of people who participate will lose their money.

The majority will lose because the scheme cannot grow forever at the rate that it requires. If each person must recruit 8 others, then in just 8 recruitment cycles more than 1.5 million people will be involved. A few more cycles of recruitment and the number required exceeds the population of the earth. Of course, the schemes do not run that long. They collapse sooner as reality dawns or authorities close in.

Why is participating in this scheme illegal? Because the scheme requires that a certain group cannot recoup their money. It is designed to trick and defraud these people. The losses occur not because demand declines or markets have changed or because of competition or any other cause that is normal and legal in business. The Gifting Scheme is set up from the beginning so that, at a certain point, the people at the bottom won't be able to find new investors and will therefore lose their money. If you recruit someone into such a scheme, you are participating in a fraud upon those at the end, whoever they are.

Should you care? Beyond the legality is the ethical question of enrolling friends and neighbors into an illegal scheme and one in which the majority will eventually be defrauded. No matter how many join, the bottom level will always have 88% of the participants -- who will eventually lose. If you accept that the scheme is illegal but believe that the losses are largely harmless, consider this: If the scheme requires each person to enroll just eight others, by the sixth level (starting with just one person at the first level), there will be 37,449 people involved. Of this number 32,768 people will be on the bottom losing level. And if each one pays in $5,000, that's a loss of more than $163 million. Consider the effect of this on one community. Consider the effect on your neighbors, friends, and relatives. This is a very large-scale swindle, bigger than most embezzlements, stock frauds, bank robberies or deceptive advertising scams.

Finally, beyond the illegality and on top of the losses of money, consider the effect on people's relationships. All those who lose their money will have given their money to someone they knew well, trusted or loved - perhaps a next door neighbor, a fellow church member, a brother-in-law. When the people realize they were lied to and defrauded, often these cherished, important relationships end with the scheme's collapse.

by Robert Lawrence FitzPatrick

There has been much information in the news and many public warnings about scams that originate in Nigeria and are promoted to people in America. Few people, however, are informed or warned about an "American" scam that is promoted to people all over the world.

The "Nigerian" scam" begins with what seems to be a private email solicitation. It offers an opportunity to gain a large sum of money that the scheme's promoters want to get out of that country or has been left over from some government or business operation. But first the person being solicited must send a small amount of money to get the process started. Then, a larger amount of money is required to complete the deal, then even more is needed to get final approval.

Eventually, the victims of the Nigerian scam discover that the promised money will never be sent. They realize the business or government program that was supposedly to provide the windfall of money did not exist. They have been defrauded. However, out of embarrassment or perhaps fear, the victims seldom report the incidents to the authorities.

The "American" scam operates similarly. There is a promise of large sums of money. A small investment is required to begin. Then, more money is sought to remain "qualified" to gain the promised money and even more to achieve the higher position in which the big payoff will supposedly be earned. Finally, still more must be paid in order to be "trained and motivated" to get to that promised payoff. In the end, the same result occurs -- lost money, shame and silence.

Government officials in Nigeria recognize that the schemes originating from their country are frauds. The victims of the Nigerian scam also come to realize they were in a fraud. The American scam, on the other hand, is generally promoted as a legitimate business and the government seldom investigates it. Consumers in America and everywhere else cannot expect protection or even education. Additionally, most victims do not understand how they lost their money. Even fewer realize they have been swindled.

The "American scam" is called multi-level marketing (MLM) or sometimes "network marketing." It promises the "opportunity of a lifetime" from owning a "home-based business." In some countries, it claims to be the purest and best example of "free market capitalism." In fact, it has caused financial loss, wasted time, ruined careers and broken families all over the world. Its actual operations and its terrible financial results are hidden from those solicited.

The largest MLM company, Amway/Quixtar, and hundreds of others, such as Nuskin, Herbalife, Melaleuca and Nikken, operate it in such a way that 99.9% of all people who invest will never earn a net profit. For this reason, MLMs such as these must be treated by consumers as financial traps, not "opportunities." Since deception is routinely employed in order to get people to join these schemes in which near all will lose their money, they should not be categorized as a real businesses, but rather understood for what they are - elaborate pyramid schemes. Far from the best that capitalism offers, these are a terrible distortion, misuse and a blight on the marketplace.

Multi-level marketing is technically legal in many countries. For other countries, MLM is allowed, under certain conditions, but these restrictions are seldom investigated or enforced. MLM causes many lawsuits, complaints and controversies. Some countries have no laws that regulate or define MLM. In this gray area of legality MLM or "direct selling" has largely become a "camouflage" for "business opportunity" fraud. Here is how it works.

The Five Ploys Used to Get Consumers into the "American Scam"

Ploy #1: You can make money selling the products to friends and neighbors!

Amway/Quixtar and most "MLM" companies say they offer the "world's greatest business opportunity" which, they say, is based on selling products. Each salesperson is told he or she will be an "independent business owner" (IBO) that can buy products at wholesale prices and then sell them at a profit on a retail basis to friends and neighbors.

This turns out to be untrue for all but a rare few of the companies. Almost no one actually earns a real profit from buying the MLM products and reselling them to the public. Why? The MLM products are too expensive. Similar or cheaper products are available in stores, by mail or on the internet. There is little real need or demand for these products. Also, MLM companies such as Amway/Quixtar authorize so many sales people that competition for retail selling is too great. The costs and time required for buying the goods, promoting the business, delivering them or working with customers outweigh the small profit allowed. Also, the requirements for purchases are greater than most people can meet. Most of the salespeople wind up with much unsold goods.

Ploy #2: You can make "bonuses" from the products purchased by all those you recruit.

So, how do the schemes continue if few people can profitably retail the products to customers? This is where the next phase of the deception in the American Scam begins. MLMs tell the new "IBOs" or "distributors" that they can actually make even more money if they will recruit other new sales people into the programs. Each sales person is promised a "bonus" from the purchases made by new recruits. Additionally, each person can earn more bonuses when their recruits get recruits of their own. Each person can make money on many "levels" of new recruits.

So, even though virtually no one is able to make any money selling the products on a retail basis, each person is urged to recruit more people into the business.

What exactly is the "business" then?

Recruits are told that the real business that earns the big money is based on recruiting other people like themselves. Then their "sales" will "multiply." If they recruit 5 people who each recruit just five others, for example, then the person at the top will now have 30 in all, and that top person will get a "bonus" on each purchase made by the newest recruits. It does not matter that almost none of these recruits will ever sell any products. Each one will purchase products. The bonuses are paid on those purchases, not on their sales (which almost never occur anyway.)

The numbers don't stop there. They can go on "forever." The 25 new people can do the same recruiting, bringing in 125 more and on and on it goes. Though no one may be able to make money selling the goods on a retail basis, they can make money if they just recruit enough others. The ones they recruit will need to do the same.

Just as the claim that selling the MLM products at a profit to friends and neighbors is untrue, the promise that everyone can recruit a large "downline" is also false. Basic arithmetic requires that for one person to be at the "top" most must be at the "bottom." Only a tiny few can ever be at the position where the bonuses are paid, while most people will be at the bottom where they will be losing money.

There is a second part to this trick. In order for the salespeople to be "qualified" to receive the bonuses on the purchases from an "endless downline" of new recruits, they must meet a quota of purchasing. So, most people will continue to buy products every month or pressure their downline to also buy products while they try to recruit others into their "organization." The initial investment now grows each month that they remain in the program, while the time and costs of recruiting also multiply. Losses mount.

Ploy #3: The higher up you are in the organization, the more you make.

Amway/Quixtar and other MLM schemes use complicated pay plans. Few people understand exactly how the "compensation plans" work. But one part of all of them is always the same. Quotas of recruits and volume levels of purchases from the group are required to reach higher "bonus" levels. The higher you move up the scale, the more you make and the only way to get "up" in the organization is to recruit others. As a result, many people buy more goods to reach the higher levels or they will buy the products in the names of others that may not have the money themselves. In his way, the quotas are met. Unfortunately, the costs have risen higher than the bonuses that are received. More losses.

Ploy #4: To be successful you need training and motivation and to listen to the people who are already successful in the program

Again, a multi-level deception is promoted. The training courses, seminars and the books and tapes are very costly and add to the mounting losses. The 99.9% loss rates do not change. But, even more misleading is the claim that the people delivering the seminars and selling the books are "successful" at the MLM business. Many are not. Most of the money they earn comes not from the business they are urging others to join or to stay in. It comes from selling books and tapes and seminars! The books and seminars do not help recruits become successful. They only reward the people doing the selling.

Now comes the final trick regarding the training and motivation ­ the recruits are told they themselves can make money by selling books, tapes and seminar registrations to new recruits.

The new IBOs start out believing the business is based on selling products to real customers. They discover this is not profitable. In fact, very little products are ever sold to real customers. All the rest are sold only to the "sales people."

They then are told that the big money is earned by recruiting other IBOs ­ who buy products ­ and getting bonuses on those purchases. Some actually pay their own money to get others into their group so they can qualify for higher "bonuses." But they soon they discover that they are starting at the bottom of someone else's "downline" and that building their own is extremely costly and may take years. They are never told that the upline/downline structure places 99.9% of all IBOs always at the bottom, but many do begin to realize that the only way they can make a profit is by enrolling others who will lose.

Then, they are told they need to invest more money into training and motivation seminars, books, and tapes. They spend large amounts traveling to the seminars. They buy books and tapes every week. Still no profit. Just more losses. Finally, they try to recoup these losses by selling the costly books, tapes and seminars themselves. They try to make up for their losses by getting money from others who are going to lose. But this too turns out to be a fruitless quest. Trying to make money off other people's losses means chasing after more and more recruits. They do not realize that more than 50% of all recruits quit within the first year. Soon, they will be among those who quit.

Ploy #5. The Ultimate Deception: If you do not succeed, it is only your own fault.

In the Nigerian scheme, the victims are led to believe that the money they are promised might have been gained illegally or at least without knowledge of the government or the tax collector. So, when they discover they fell for a scam, they are unlikely to report it to the police. That might get them in trouble. Besides, who wants to publicize falling for a scam? They could appear greedy, gullible or dishonest.

The multi-level marketing scheme ­ the "American" scam ­ achieves the same result. Each new recruit is told from the beginning that the program is the "best business opportunity in the world." The seminar leaders flashed expensive watches, jewelry and cars. They told of their luxury homes and exotic vacations, all gained, they falsely claimed, from selling MLM products. Prominent politicians and even religious leaders are paid large fees to speak at the recruitment meetings, giving the schemes the appearance of endorsements and blessings.

And so, when the recruits finally give up and quit, losing thousands of dollars, or maybe tens of thousands and months or even years of effort, most believe what they were told: it was their own fault.

Ten Plain Truths

1. 99.9% of all people who join Amway/Quixtar and other multi-level marketing schemes like it never earn a profit. The losses are so large that these schemes cannot be called a legitimate "business opportunity."

2. To get people to join a MLM scheme in which nearly all will lose requires deception. The promoters do not tell the truth.

3. The people at the top hide basic facts from recruits such as average income, actual costs of doing business, drop out rates, and how much of the total bonus money they receive. They also do not reveal the source of their money, most of which comes from selling "training" materials. Often, their income is from recruits in other countries.

4. Very little of the MLM products are ever actually sold to consumers. The people who buy these products do so as part of investing in a "business opportunity." The business is therefore not "direct selling." It is actually about promoting a bogus business opportunity.

5. More than 50% of all people who join these schemes quit in the first year. Trying to make money from recruiting is therefore a long and costly effort. When a person starts out to build a 'downline" they are already at the bottom of someone else's very large downline. Only a tiny few can ever be at the top.

6. Those few that start at the top of the scheme or who climb to the top make their money directly from the losses suffered by all the latest recruits.

7. The training and motivation seminars, books and tapes are a secret business run by the top promoters of the scheme. Buying tapes and books does not increase a person's chances for success. It only adds to the losses.

8. The people selling the books and tapes are not necessarily successful in the MLM business. Rather, they make most of their money selling the recruitment materials. Claims that they are successful and that the business is a "great opportunity" are false.

9. The schemes recruit more and more people every year, but also many quit. So the scheme can run for many years before it must find other areas with more people to recruit. The longer is operates, the more people it has harmed.

10. The main reason the government of the United States does not investigate these schemes for deception and unfair practices or for running pyramid schemes is that leaders of these schemes contribute huge amounts of money to the politicians' political campaigns. Consumers, therefore, must look out for themselves. Just because a particular MLM such as Amway/Quixtar is not prosecuted by the government does not mean it is legitimate or that you will ever make any money from it.

by Robert L. FitzPatrick

Published in 2004 in Marketing MasterMind, a monthly publication of the Institute of Chartered Financial Analysts, a division of ICFAI University, Bangalore, India.

As market-based economies become the prevailing global model, millions of people are being exposed to sales promotions, income opportunity solicitations, and investment schemes with which they have no experience or knowledge. Vulnerability to deception and the need for consumer education correspondingly reach global heights.

One especially dangerous deception is now luring millions of people in Asia into financial losses. Referred to here as the "non-retail direct selling company", this type of scheme originated in the United States in the late 1970s and is now being exported around the world. Each year, it causes billions in financial losses and is seeking to entrench itself as an accepted form of business. It combines the purchase of costly products with the false attraction of earning an income as a self-employed person in "network marketing" or "multi-level marketing" businesses.

For many people owning a profitable and independent business represents the dream of economic freedom and financial opportunity. However, this dream becomes a nightmare when a consumer is misled into a non-retail direct selling business. The non-retail model results in loss rates of more than 99% for all that sign up as "independent distributors" or sales agents.

These losses in the non-retail schemes have nothing to do with competition, ambition, sales skills or any other normal market factor. Losing money in such a scheme is not failure, and making money is not success. These are not true businesses at all because there is no fair exchange of value. Rather, they are elaborate pyramid schemes in which the profits to a few come directly from the massive losses of many. Failure is therefore predetermined for nearly all. Those who "succeed" do so on the basis of deception, not entrepreneurship.

Pyramid Scheme Alert, an international consumer education group, has had extensive experience with this particular type of scheme. The group has researched the pay plans, business structures, distribution of payments, and costs of participating in the schemes. Some research was gained from serving as expert witnesses in court cases against them.

Like all consumer frauds, the non-retail scheme attaches itself, parasite-like, to a legitimate direct selling, a form of business that consumers know and trust. Many governments have not yet learned how to distinguish these non-retailing frauds from legitimate direct selling businesses.

The non-retail direct selling scheme promotes a "home-based business opportunity" in which an individual consumer signs up to become a sales representative, distributor or marketing agent for the company. In this way, the scheme appears superficially to be a traditional direct selling business in which individuals retail products they have purchased from a supplier company at a wholesale price. The difference between the wholesale price at which they are purchased and the retail price at which they are sold to consumers constitutes the profit to the sales representative.

Yet in these schemes, very little of the products are actually sold to anyone other than the sales people, and virtually none of the salespeople earns a net profit from retailing products to consumers. The typical company of this type will claim it is a direct selling business and will often highlight "retail" sales. However, the average number of retail customers per sales representative is far too small to support a retail business. The retail selling is therefore only part of the camouflage. This business is not based on "direct selling" but on recruiting other sales representatives in a pyramid fashion.

The sales organization of the non-retail direct selling company is structured in a complex multi-level hierarchy. Each new recruit to the business is linked to those above in an "endless chain" with the upper levels receiving commissions from the company based on the volume of purchases made by all the recruits below. This multi-level structure does not facilitate retail sales or sales management. Rather the design serves to create a wider and deeper base of sales representatives on whose purchases those at the top will gain commissions and rebates. The commissions to the higher levels are based not only on the purchases of more people but also increase in rate per sale for each higher level. As one moves up, he or she makes money on more people and earns more per sale on all below as well. In short, the design enriches the top recruiters at the expense of all others.

Why Retailing Does not Occur

Several key factors - in combination - make retailing unfeasible and unprofitable and reveal the company to be a pyramid recruitment scheme, not a direct selling business as its claims to be.

1. The products are high priced and non-competitive.
2. The products are undifferentiated. Similar or even identical products are available for purchase from other companies, in stores or over the Internet.
3. Choice is restricted in the direct "person-to-person" method of selling and more people prefer to purchase goods of this type in stores where there is wider choice and no pressure upon personal relationship.
4. The profit margin (difference between wholesales and retail) is inadequate for covering sales costs and achieving a net profit. Discounts and free samples are often required and all other sales and marketing expenses are borne directly by the individual sales person. At least a 50% gross profit, which equates a 100% markup (Purchase for $50 and sell for $100) must be viewed as a bare minimum for retail selling and in many cases is still inadequate. As the net profit shrinks the requirement to increase volume grows. Yet the time required to increase the volume makes the selling effort unprofitable and unfeasible. It is simply not worth the effort. Recruiting other sales reps replaces the effort to sell directly.
5. The competition for selling the product is too high for profitable retail selling. The non-retail direct selling scheme allows - and strongly encourages - the authorization of unlimited numbers of sales representatives. Each salesperson is instructed to enroll close friends, neighbors and family members also as salespersons. In this manner, retail sales to these people are no longer possible since they now can purchases the goods at wholesale prices. As saturation of authorized sales people occurs in a community, cost-effective retail selling becomes nearly impossible.
6. The company offers little training or support for retail selling. The focus and priority are placed on training, motivating and rewarding the recruitment of more and more sales people.
7. The compensation plan richly rewards the recruiter over the retailer, luring the new sales representatives immediately into recruitment efforts and away from retailing, even if they have not already determined that retailing is unprofitable. The non-retail schemes pay more to upper levels of hierarchy - who have nothing to do with the sales - than they do to the person at the bottom who actually makes the sale. Not only do those higher up the chain receive more pay - per sale - than the ones making the sales but also they do not have to incur any sales costs. Their profit per sale is therefore many times greater. The result of this pay plan is to discourage retail selling.
8. Whatever opportunity exists in the scheme for profitability is based on being positioned high on the chain. Recruiting is the only way to advance to the higher levels where the leveraged high incomes can be gained.

The percentages of commission, the purchase requirements for rising to each new level, and other rules associated with the system are complex and unfamiliar to the new recruit. Few recruits engage in due diligence or ask for actual income or expense information. The scheme is not required by law and does not divulge the actual financial records of success or failure of those who have invested in the past.

Misleading Promises

Instead, the non-retail direct selling schemes present a compelling and very alluring picture to potential recruits that diverts attention from the flawed structure and its disastrous outcome. Virtually all companies of this type in every country they operate in make the same alluring and misleading promises to recruits:

1. Opportunity to earn “residual” income, that is, ongoing commissions on the purchase by others whom you recruited or whom they in turn recruit.
This expands earning power well beyond ones own personal efforts. You can be freed from “wage slavery.”
2. Continuous income without continuous work. Most products are “consumable” goods that people might re-use month after month.
The most common commodities in these schemes vitamins, food supplements, skin care products, long distance phone service and household cleaning products are the most prevalent.
3. Extraordinarily high-income potential, much higher than most salaries or professions would normally promise.
This is claim is based on the theoretical potential of expanded recruitment efforts of others. A typical presentation shows the potential of one distributor recruiting just five other people that each recruit five and this continues just seven “generations.” The result is over 78,000 sales representatives. Commissions on all of their purchases, the promotions claim, will go to that one sales person at the top, month after month. That person could be you. Does your current job offer that kind of income opportunity?
4. Possibility of early retirement provided by a continuous, residual income stream from the labors of others in your sales organization.
No need to work and save all your life.
5. Personal freedom, financial independence as a self-employed person.
No more bosses.
6. Time flexibility to set your own work hours.
More time with the children, to take vacations, and to do more in life.
7. Security provided by self-sufficiency against the many changeable and unpredictable factors in today’s economy, including corporate downsizing, government cutbacks, inflation, corporate profit taking, increasing requirements for high tech competency in the job market and job discrimination against older workers.
You are protected from all that.
8. Opportunity to enter the business for a low initial investment of money.
No risk.
9. No need to develop highly specialized skills or obtain higher education in order to succeed.
Anybody can do it. You already have what it takes.
10. No marketing expenses or “cold calls” to strangers are required because your friends and associates are your first prospects.
Your first recruit is as close as your next door neighbor or your own mother in the next room.

Pyramid Math

Sadly, none of these promises is fulfilled. The endless chain structure of the business must inevitably doom the vast majority - as many as 99% - to financial losses. This is because more than 90% will always be in the bottom ranks where there are not enough recruits below to provide an income. This can be illustrated in a simple 6-level chain in which each person recruits just 5 people. At least three levels of recruits (5 + 25 +125 = 155) are needed for each participant to begin to achieve a profit.

Illustration:

Top - 1

Level #1. - 5

Level #2. - 25

Level #3. - 125

Level #4. - 625

Level #5. - 3,125

3,906 participants total

Since only those with three levels below them are profitable, only the Top person and the individuals in levels #1 and #2 qualify. Each of the people in next three levels below does not have enough "downline" to generate a profit. This means that only 31 out of 3,906, or less than one percentage in the six-level chain, have as many as three levels below them and are profitable. More than 99% are unprofitable based on their position.

This basic formula holds true no matter how much further the chain extends. Approximately 99% are at the bottom of the chain where profit is not possible.

For example, if the scheme recruited one more level, Level #6, another 15,625 participants would join. The total would now be 19,531. The number in profitable positions, Top, and the individuals in Levels #1, #2, and #3, would grow to 156 and this number would still equate to less than 1% of enlarged organization.

The big numbers which are cited by the scheme's promoter as the "income potential" are at the deepest level of the "downline." Only a tiny few can ever recruit to this level. This is mathematically predetermined from the start by the MLM pay plan.

The trick of the scheme is to cover up this reality and to convince each and every enrollee that he/she can succeed by building this large and deep downline. Recruits are told that the program is a formula for wealth for all.

The bottom levels could, theoretically, recoup their money by finding new distributors under them, but that would work only if the scheme could go on forever and there were an infinite number of people.

Of course, the schemes do not go on forever. Nor do they continue until they exhaust all possible new recruits. While the scheme is structured as an endless chain, and makes promises to new recruits as if it were "endless" and could fulfill its promises of success to all, in practice, the chain keeps breaking at the bottom and being "repaired."

The way the mathematical limitation works itself out is in the pattern of dropouts. Non-retailing pyramid schemes don't fully or quickly saturate areas with members because most people quit within a year. All such schemes experience a 50-90% annual dropout rate.

Dropouts thwart the recruitment process at the lower levels. The people trying to build the downline are always dependent on others below to "duplicate" the process. When their new recruits become discouraged and drop out, the rebuilding process must start yet again. And while the hopefuls engage in this constant rebuilding effort, they are also continuously paying money to the scheme and its organizers for products and training as well as incurring other business expenses. Eventually, they drop out too.

Since almost no one in the chain is retailing the product, they can only recoup their investments in products and training and other costs by recruiting other sales representatives, but the endless chain structure dooms most to lose in that system.

With its ongoing operation, continuous enrollment of excited new recruits and public displays of wealth and success by the organizers, the organization appears to the uninformed as viable, stable, and successful. Most schemes can go on for many years by successfully recruiting new people to refill the bottom ranks, which become open as past recruits quit the business in "failure." Such is the elusive and tricky nature of the scheme.

Blaming the "Failures"

Many of those who quit are so convinced that they personally "failed" – they are told by the organizers that everyone can succeed, so if they do fail it is only their own fault – that they do not complain about the scheme to the government authorities or even warn friends about not also joining. In this way, the scheme can continue to inflict losses on very large numbers of people without government interference or media exposure.

Yet, when analyzed more closely, the non-retailing schemes are revealed to have almost no true customers, since almost no products are ever retailed to the general public. Virtually the only people buying the goods are the scheme's own sales representatives and their friends or family. They buy the goods, not on the basis of their value or need for them, but on the basis of false promises of income. Few continue to buy these goods after quitting as sales representatives. Nor does the scheme have a stable or successful sales force. 99% of the sales representatives lose money in the scheme and virtually all inevitably quit in due time.

A business with almost no customers and virtually no profitable sales representatives could not be called a "sales" business and certainly it is not a "direct" selling business. Indeed, cold facts expose it for what it is - a pyramid recruitment scheme that masquerades as a direct selling company. "Sales" are achieved deceptively. The commercial products are part of a disguise and serve to launder the money that is transferred from successive cycles of recruits to the crafty organizers at the top. The true and actual "product" of this type of scheme is a false promise.

Downline. The distributors recruited by a given distributor who receives commissions on their sales and the sales of the distributors they recruit.

Inventory loading (also called front-end loading). Stocking up on products to meet sales goals, a practice that is promoted with claims that it will push the new distributor to higher bonus and/or leadership levels quickly. In reality, it increases the risk of significant financial loss if sales do not occur.

Multilevel marketing (MLM). Any marketing program in which participants purchase the right to recruit additional participants, sell products or services, and be compensated for the sales by people they recruit as well as for their own sales.

Network marketing. Term that MLM companies prefer to describe themselves because "multilevel marketing" sounds more like a pyramid scheme.

Naked pyramid scheme. Pyramid scheme that does not involve the sale of products. New participants pay a fee to participate and hope to profit by recruiting others into the system. Chain letters are an example.

Product-based pyramid scheme. Pyramid scheme in which new participants are induced to buy products they supposedly will resell. State laws against pyramiding say that an MLM plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors. However, MLM companies typically structure their payment plan so that recruiting is more profitable.

Pyramid scheme. A plan that promises large profits based primarily on recruiting others to join its program and not based on profits from any genuine investment or sale of goods to the public.

Upline. Distributors who are above a given distributor in the MLM hierarchy and who receive commissions (overrides) from that distributor's sales.

Jon M. Taylor, PhD

Multilevel companies that are based on profits from recruiting rather than retailing should be regarded as pyramid schemes or "recruiting MLMs." This article describes five ways to distinguish them from "retail MLMs" in which the company pays generously for retailing products without recruiting a large downline. "Recruiting MLMs" typically display five features:
1. Recruiting of participants is unlimited in an endless chain of recruiters recruiting recruiters.

Ask whether unlimited recruiting is allowed. When a given market is saturated, and the program must move on to another location or introduce new products or divisions to continue, the opportunity for each new person to make money becomes less and less as the programs expands.

2. Advancement in a hierarchy of multiple levels of "distributors" is achieved by recruitment, rather than by appointment.

Ask whether participating "distributors" advance their position (and potential income) in a hierarchy of multiple levels of "distributors" by recruiting other "distributors" who in turn advance by recruiting distributors under them, etc.? If so, the result is self-appointment through recruitment to ascending payout levels in the distributor hierarchy. If the only way a person can profit significantly in the scheme is through recruiting to advance to higher payout levels (or to buy another's downline), this strongly indicates a pyramid scheme.

3."Pay to play" requirements are satisfied by ongoing "incentivized purchases." These are purchases of goods and services that are required to participate in commissions or to ascend in the distributor hierarchy. If they are required to participate in the "business opportunity," then whether they are used, sold, given away, or stored is irrelevant. They should be considered a cost of doing business.

Ask whether prospective "distributors" are encouraged to make sizable investments ("front loading") in "incentivized purchases" in order to take advantage of the "business opportunity" and later to continue qualifying for advancement or higher payout in overrides (commissions and bonuses). This practice, can result in large losses if the products cannot be resold. Also be wary of plans that require minimum periodic purchases ("pay to play") to qualify for commissions or advancement. Do not sign up for continuing product purchases on auto-ship through an automatic bank draft or credit card, rather than making occasional purchases as needed. Such purchase requirements may be disguised investments in a product-based pyramid scheme or a clever attempt to disguise pyramid investments as product purchases.

4. The company offers commissions and/or bonuses to more than five levels of "distributors."

Ask whether the company pay overrides to distributors in a hierarchy of more levels than are functionally justifiable. Even in major corporations, the entire world marketplace can be covered in five levels of sales management ­- branch, district, regional, national, and international sales managers. Paying commissions and bonuses on more than five levels in an MLM program primarily enriches those at the top at the expense of those at the bottom. You would be wise to avoid any program that pays overrides on more than five levels. Breakaway compensation systems are particularly exploitive, as payments are on a hierarchy of "breakaway" organizations of whole groups of participants, not just individuals -- creating an extraordinarily high loss rate, except for those at the top of a "mega-pyramid of pyramids."

5. Company payout per sale for each upline participant equals or exceeds that for the person selling the product, creating inadequate incentive to retail and excessive incentive to recruit -- and an extreme concentration of income at the top.

Ask whether a "distributor" purchasing products "for resale" would receive about the same total payout (in commissions, bonuses, etc.) from the MLM company as participants several levels above who had nothing to do with the sale. If so, the company's payments to the person retailing the product would be pitifully small, while those at the top of the upline can compound the small commission per sale by the sales of hundreds or even thousands of downline distributors. This is great for the upline leaders but lousy for those attempting retail sales. Avoid any MLM company that pays less than half of all distributor payout to the person actually selling the products to outside customers.

Never accept income projections of retail sales at full retail prices, especially for products that are overpriced and not competitive in the marketplace. Also be wary if you are asked to choose between two options or "tracks" -- one for those who want to "retail" the products and another track for those who are serious about "building the business." This sales pitch usually indicates that the incentives are heavily weighted towards recruiting

Where valid data are available, recent research has demonstrated that when all five of these red flags are found in an MLM, the percentage of participants who lose money is 99.9% -- even worse than the loss rates for typical no-product pyramid schemes and for games of chance in Las Vegas.

______________

Dr. Taylor is president of the Consumer Awareness Institute and a director of Pyramid Scheme Alert. Additional information is available from Dr. Taylor and the Pyramid Scheme Alert Web site.

by Michael Sampson

Members of multilevel marketing (MLM) currently are growing by leaps and bounds. But just as there are multiple members of MLM, there are as many myths and misconceptions that surround those who practice multi level marketing.

The following are myths commonly associated with MLM.

First MLM myth: Multi level marketing is a form of pyramid scheme. The fact is that - it is not. Fist of all the obvious difference between MLM and a pyramid scheme is that the former is a legal means to perform business while the latter is definitely illegal.

The common process in a pyramid scheme is that you usually have to part with a significant amount of you hard earned money in exchange for literally nothing. You get no visible services or goods. What you are supposed to have is a lot of luck and a chance to double, triple or quadruple the money you put in - if that is ever possible. But chances are --- and there is a lot of chance of this happening - the only person or persons that do get rich are the ones on top of the pyramid.

The idea is that pyramid schemes is a way to transfer funds from one person to another. But in multilevel marketing, you are given the opportunity to involve yourself in a system of business that is legal. There are actual products distributed among MLM members and networks composed of various clients and buyers.

Second MLM myth: Multilevel marketing provides better money making prospects than conventional businesses and business models. The fact is that that is not the case for all MLM ventures. There have been instances where only a mere one percent of MLM investors and distributors actually gained profit. Meanwhile, those who earn a living via MLM are also smaller in number. The conclusion that opportunities for success in a multilevel marketing business is slim is mathematically sound. This is because the structure of MLM can actually support a very small number of successful MLM winners.

Basically the system is unstable and the quantity of distributors in a specific area is unlimited, also there is no clear or specific market potential evaluation.

Third myth: Multilevel marketing is a Ponzi scheme in disguise

The fact is that - it is not. A Ponzi scheme derived its name from a man who existed during the 1920's whose last name was Ponzi. Charles K Ponzi operated a scheme wherein older investors earned money literally by sitting down and doing nothing thanks to the influx of money invested by newer members.

The difference between a Ponzi scheme and a pyramid scheme is that the Ponzi scheme ollows no clear structure or hierarchy. Actually, there is only one --- lucky - person who collects money acquired from new investors. This person then uses the collected funds to reward, award and give these cash to older investors who were earlier promised that they will be given the proceeds originally promised to be given to them.

So the bottomline is: if you are involved in a Ponzi scheme, you are then merely paying off profits originally promised to earlier investors. Ponzi schemers make you believe that they will help you make money when in actuality they are taking your money and giving it to those investors who earlier put their money in long before you did. In a Ponzi scheme there is also no visible goods and services provided or distributed.

Fourth myth: Multilevel marketing is a way of life that gives you security and fulfillment.

The fact is that --- it does not. In reality no such business exists that will give anyone a secure and fulfillin way of life. No business is perfect, there will always be financial ups as well as financial downs. And multilevel marketing is just as subject to that. Unfortunately most MLM advertisements and come-ons involve truly tempting forms of materialism. The excesses presented by multilevel marketing companies would make even Fortune 100 companies blush. Most MLM ventures promise scandalous wealth, personal fulfillment and luxury.

Fifth myth: Multilevel marketing is as easy as one two three.

The fact is that MLM is not for the lazy at heart. There is a misconception that MLM equals to easy money. Some even think that all they have to do is establish a few contacts - preferably those they already know like family and friends - and from there wait for their checks to arrive in the mail. Most people who actually get rich from MLM ventures are those that worked the hardest.

About the author:

Michael Sampson reviews hundreds of MLM and affiliate companies a year. You can find his most recent reviews of a very controversial MLM company 12daily pro

John Milton Fogg

The lies that limit the future of network marketing began as so many untruths do. They were told initially to bolster up our insecurity -- in this case, our industry's perceived lack of self-esteem. The lies were harmless "little white" (i.e. "okay") ones, meant to make us seem bigger and better than we really thought we were. As they always do, the lies backfired. Now, when people ask us about this or that "false-fact", and we have to admit to their fabrication, we come up looking smaller and worse than we are.

What lies am I talking about? These:

* The Wall Street Journal has said that by the year 2000, 60 to 70 percent of all goods and services will be sold through MLM.
* "Network marketing is taught at Harvard and Stanford business schools and in numerous other leading colleges and universities throughout the country.
* Some 20 percent of all the millionaires in America were created through network marketing.
* John Naisbitt, in his best-selling book, Megatrends, says network marketing is the wave of the future.

There are others. These are the leading offenders. I have yet to speak to any group of people about network marketing -- from established MLMers to the general public -- and not be asked about one or all of these statements.

And when that happens, here's what I say:

According to more than a dozen reporters and staffers, The Wall Street Journal never endorsed network marketing or "network marketing methods."

Yes, they have reported on some companies. But they certainly never said that MLM would be moving 60-plus percent of all U.S. commerce - goods and services -- by the year 2000.

They're not stupid!

The U.S. sells about $6 trillion plus worth of goods and services per year - give and take ten or twenty billion. By the most aggressive accounts, network marketing (which for the sake of quoting really BIG numbers must include the Direct Selling industry) accounts for $50 billion in annual sales. More conservative estimates put the figure at a max. of $15 to $20 billion worldwide. Super-conservative folks say MLM is about $10 billion really.

Hmmm. One percent of all U.S. goods and services would amount to $55 billion. 50 percent -- 10 to 20 percent less than the journal was falsely quoted as saying -- would be $3 trillion. Not bad growth for the next six years!

Okay -- get out your calculators. This is a lie of the lowest order; not even creative -- just stupid.

If someone tried to sponsor you, boastfully claiming he or she made $30,000 per month, and you discovered that he or she really made one percent of that -- or $300 -- what would you think of that person?

Enough said.

Network Marketing Sales is not taught at Harvard and Stanford business schools -- or in "numerous other leading colleges and universities throughout the country". Truth is, most of them detest us. They don't understand us and do not care to. As Harvard 'B' School professor Thomas Bonora recently said in an article in Marketing News:

We do not teach such methods [MLM] at the Harvard Business School; they are not part of the curriculum; to my knowledge, they are not taught at this or any other reputable business school in the country . . . Multi-Level Marketing schemes, like chain letters and other devices, sometimes are at the borderline of what is legal -- and over the borderline of what is ethical . . .

He concluded by saying that examples of legit MLMs are few and far between. Not a glowing endorsement for such a valuable curriculum.

Harvard has reviewed a case study of Mary Kay Cosmetics. Also, there are courses in "Networking" as it pertains to management resources. That's it. Stanford refuses to discuss the subject.

Twenty percent of all the millionaires in America were not created through network marketing. By most accounts, as many as 90 percent of them were created through real estate, 90 plus 20 equals 110, and that kind of math would get an F in any school -- even Harvard 'B'. And how many millionaires came from manufacturing or distribution (the family Walton of Walmart -- $25 billion plus) . . . ? High-tech . . . (Bill Gates of Microsoft, the richest man in America -- and the 300-plus millionaires his company has created . .or Ross Perot)? Franchising (Mrs. Ray Kroc of McDonald's) . . . ? Entertainment . . . ? Etc. . . . ?

We've got lots of men and women who make a million dollars a year in this business. Many more who've made $1,000,000-plus in their Networking careers. But . . . 20 percent of all the millionaires in the U.S.? Please, use some common sense.

The only possible reason I can think of as a basis for the existence of this 20 percent figure is that the founders of Amway, Rich Devos and Jay Van Andel, have a combined net worth in excess of $6 billion. That's 6,000 millionaires right there. Maybe that's where the 20 percent comes from.

John Naisbitt never mentioned network marketing in Megatrends, Megatrends 2000, Megatrends for Women, or anywhere else for that matter. I can't even find a mention in back issues of his far more liberal Trend Letter. (If you can, please let me know.) I called him and asked him for his opinion on MLM and he said -- well, his people told me -- he didn't have one. There is no listing of network marketing or MLM in any index of a Naisbitt book. The references he makes to Networking are many. The use of them by MLMers are convoluted misquotes and rubbery stretches of the truth.

A good friend of mine -- a leading MLM trainer and acknowledged expert who is depended upon by many people as a source of "how-to truth" about this business -- recently sent me a generic prospecting product, proudly offering it for listing in our Upline Resources catalog. Sadly, I couldn't offer it -- because it included every one of the above lies.

If this garbage (it's much nicer to use then the affected French pronunciation) finds its way into this guy's repertoire, how many others are running around saying this stuff? We've got to paper-train this industry!

You can't build lasting relationships with people -- let alone government regulators and the press -- with lies. You will be found out -- and when you are, your stock, and the stock of the entire industry, will go way down.

The truth is, there is so much that's positive to be shared about network marketing -- facts, not even opinion, much less lies. You may make a sale with a lie, but you won't create a customer, and you certainly won't build a successful Network of Distributors.

What you'll make is a house built on get-rich-quick-sand.

Here's my request: Please -- Do not say false and misleading things about network marketing to anyone. If you are insecure about the legitimacy of this business and feel the need to bolster up your courage and confidence -- please shut up 'till you bone up and grow up. . . .

I urge each of you to quash the lies you find out there. Tell the truth. Honesty is and always will be the very best of policies. For my part, I will continue to set the record straight every chance I get. Integrity is our most precious asset. Like our bodies, it requires proper diet (the truth) and exercise (telling it) to become healthy and prosper.

__________________

Mr. Fogg is a widely recognized writer and authority on network marketing sales. He founded two MLM magazines (Upline and Network Marketing Lifestyles) and has authored more than 25 books and tapes, the most prominent of which is the book, The Greatest Networker in the World. No longer involved with either of the magazines, he now operates The Greatest Networker.comUnity, of Crozet, Virginia, which offers consultation and training in network marketing. This article was slightly condensed from its original publication in Upline several years ago.

by Stephen Barrett, M.D.

The roots of multilevel marketing are intertwined with those of the Amway Corporation and its Nutrilite product line. The Nutrilite concept is said to have originated about during the early 1930s in the mind of Carl Rehnborg, an American businessman who lived in China from 1917 to 1927. According to Amway publications, this gave Rehnborg "ample opportunity to observe at close range the effects of inadequate diet." He also "became familiar with the nutritional literature of his day." Concluding that a balanced diet was needed for proper bodily function, he began to envision a dietary supplement which could provide people with important nutrients regardless of their eating habits.

After seven years of "experimentation," Rehnborg produced food supplements which he gave to his friends to try. According to his son, Sam, who became Nutrilite's president and chief operating officer:

After a certain length of time, Dad would visit his friends to see what results had been obtained. More often than not, he would find the products sitting on the back shelves, unused and forgotten. It had cost them nothing and was therefore, to them, worth nothing . . . It was at this point that he rediscovered a basic principle-that the answer was merely to charge something for the product. When he did, the friends, having paid for the product, ate it, liked it, and further, wanted their friends to have it also. When they asked my dad to sell the product to their friends, he said, "You sell it to them and I'll pay you a commission."

Carl Rehnborg's food supplement business, which thus began as the California Vitamin Corporation, changed its name to Nutrilite Products in 1939 when it moved to larger quarters. According to Federal District Court records, significant out-of-state distribution of Nutrilite supplements began in 1945 when a company operated by Lee S. Mytinger and William S. Casselberry became exclusive national distributor [1]. Rehnborg acted as "scientific advisor" in the distributional scheme and would explain to sales groups that his supplements contained a secret base of unusual therapeutic value and were the answer to man's search for health.

Gross sales soared to $500,000 a month, but the promoters also ran afoul of the law. In 1947, the FDA began a 4-year struggle to force Mytinger, Casselberry, Rehnborg, their respective companies, and some 15,000 door-to-door agents to stop making wild claims about their products. Potential customers were being given a booklet, "How to Get Well and Stay Well," which represented Nutrilite as effective against almost every case" of allergies, asthma, mental depression, irregular heartbeat, tonsillitis, and some 20 other common ailments. The booklet, which contained testimonial letters, also implied that cancer, heart trouble, tuberculosis, arthritis and many other serious illnesses would respond to Nutrilite treatment.

After Mytinger and Casselberry, Inc., was asked by the government to show cause why a criminal proceeding for misbranding should not be started, the booklet was revised. A "new language" was devised which referred to all diseases as "a state of nonhealth" brought about by a "chemical imbalance." Nutrilite would cure nothing -- the patient merely gets well through its use. Most direct curative claims were removed from the booklet, but illustrative case histories were added. Although continued governmental pressure led to removal of the case histories, the booklet remained grossly misleading.

In 1951, the Court issued a permanent injunction forbidding anyone who sold Nutrilite products from referring to any edition of "How to Get Well and Stay Well" and more than 50 other publications that exaggerated the importance of food supplements. The court decree also contains a long list of forbidden and permissible claims about nutrition and Nutrilite products.

Amway's founders, Rich DeVos and Jay Van Andel, were friends who became Nutrilite distributors after high school graduation. They were extremely successful and built a sales organization with over 2,000 distributors. Fearing that Nutrilite Products might collapse, they formed a new company, the American Way Association, later renamed Amway. They began marketing biodegradable detergent products and other household cleaning products and later diversified the product line to include beauty aids, toiletry, jewelry, furniture, electronic products, and many other items. Gross sales rose steadily from half a million dollars in 1959 to over a billion dollars by the early 1980s.
Reference

1. Notices of judgment under the Federal Food, Drug, and Cosmetic Act. D.D.N.J., F.D.C. 3381-3383, Issued Aug 1951.