iOS app Android app More

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors
Steven Hassan

Steven Hassan

GET UPDATES FROM Steven Hassan

Beware the "Main Street Bubble" of Multi-Level Marketing groups without U.S. Government Protection

Posted: 02/ 2/11 01:33 PM ET

Consumers, beware! Guard your minds and your wallets carefully. Quixtar, a former subsidiary of Amway, one of the largest multi-level marketing (MLM) companies in the world, has agreed to a $150 million class action settlement. The settlement points out the serious risks that face consumers who fall for the well-worn pitch that MLM "business opportunities" offer the average person a lucrative "home-based" income opportunity.

In tough and uncertain economic times such as these, with the unemployment rate at its highest point in twenty-seven years, life savings lost from collapsing home values and with more Americans receiving food stamps than ever before in our history, it behooves us to be aware of such consumer traps as Amway and its motivational groups. Most Americans have encountered Amway and like organizations, but few understand these groups or their true nature. I have been counseling victims and their families for many years and am amazed there is so little attention to this major "social influence" cancer.

Multi-level marketing (MLM) is the practice of selling products by recruiting independent distributors who are promised they can earn money not only by reselling the products, but by recruiting more distributors who will also recruit more distributors, and so on. However, MLM critics like Robert L. Fitzpatrick, President of Pyramid Scheme Alert, state that in many MLM companies the sale of products is simply a ruse for what in effect is a money transfer scheme, in which a few high level distributors make large sums of money while most participants lose their investments. In all cases, the big money that is promised to the last ones to join depends on "endless chain" expansion, which cannot occur. In addition, former Amway distributors have alleged that many high level distributors in the Amway system make most their profits from the sales of motivational and instructional materials to their "downline" distributors, rather than from the sale of Amway products to consumers.

Given the losses suffered by the millions of participants joining the schemes annually, why do they join and why would many stay active in these organizations? As can be seen from the Amway Quixtar Motivational Organizations entry at my Freedom of Mind Center site, sometimes these schemes employ the same mind control techniques that abusive cults use. Recruitment rallies may run till early hours of the morning; the schemes are presented as the "last best hope." Critics and doubters are cast "losers" and "dream stealers." In this way, Amway's recruiting organizations (as well as other, similar MLM schemes), can themselves be considered destructive cult groups. But these groups are commercial cults that are offering a type of transcendental ideology that is not much different from that found among the religious cults. Their salvation lies ns a financial promise.

Early in 2007, several Quixtar distributors, which it dubs "independent business owners" (IBOs), filed suit in the United States District Court in San Francisco, applying the Racketeer Influenced and Corrupt Organization (RICO) statutes, and alleging that Quixtar (which at the time was still part of Amway) functions as a massive consumer fraud. On November 3rd, 2010 the parties announced a proposed class action settlement valued at $150 million. The settlement is subject to court approval.

Pyramid Scheme Alert and its board members have received literally thousands of victim testimonials from former distributors in Amway and many other MLMs. Pyramid Scheme Alert's Fitzpatrick described the aggregate investments of millions of American in "endless chain" business opportunity schemes such as Amway, as the "Main Street Bubble." He argues that the value of the investments and effort expended by the salespeople/investors is dependent on new salespeople/investors being recruited, which cannot happen indefinitely. The value is artificially inflated on the false claim of "endless expansion." Unlike Wall Street's ponzi schemes, which collapse totally and all at once, the Main Street Bubble "collapses" continuously as the value is not realized by the "failures" who churn at a 50-80% rate a year. In aggregate that value is in the tens of billions, year after year, and that does not include the incalculable value of squandered time, wasted marketing expenses, displaced work, and debt incurred.

One would think that a form of business that causes such tremendous consumer losses would attract the attention of the Federal Trade Commission and state regulators. The FTC has sued a few MLMs, but the FTC's loss of a case against Amway in 1979, and the lack of any federal law that defines or outlaws pyramid schemes have seemingly chilled the FTC's regulatory will.

But other reasons may be at work also. The FTC has had close ties to Amway and the MLM industry it is supposed to regulate. The FTC chairman, appointed by George W. Bush in 2001, Timothy Muris, came to that position from a law firm representing Amway. Key FTC staff have taken jobs with law firms that represent the multi-level marketing schemes. After leaving the FTC, Timothy Muris and the former head of Consumer Protection, J. Howard Beales (appointed by Timothy Muris while he was FTC Chairman) worked as MLM lobbyists to influence the FTC against regulation of multi-level marketing. Beales was formerly famous as a tobacco industry lobbyist, defending Joe Camel ads to the FTC. Another former Director of Consumer Protection, Jodie Bernstein, subsequently became a lobbyist for the Amway Corporation, and has urged the FTC to exempt Amway from any new rules requiring greater disclosure by companies selling "business opportunities. The extraordinary lobbying power and political contributions of Amway and the multi-level marketing industry -- virtually all of it to the Republican Party or candidates or extreme conservative causes -- are documented in the Main Street Bubble report from Pyramid Scheme Alert, sent to Congress.

In 2006 the FTC proposed a new business opportunity regulation that would have required MLM companies to disclose the actual chances of success to prospective recruits. However, the MLM industry organized and funded an aggressive lobbying campaign, partly with the help of former FTC staff, resulting in the FTC staff recommending exemption of MLM from the proposed rule.

Will another federal agency take on the challenge of regulating MLM? With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama, consumers may see the beginnings of vastly increased Federal oversight and regulation of Amway and the MLM industry. The Act provides for the creation of a Consumer Financial Protection Bureau. Attorney and law professor Elizabeth Warren is serving as Special Advisor to the Secretary of the Treasury toward its development. Fitzpatrick and attorney Douglas M. Brooks, who has brought successful class action suits against other large MLMs, have urged that the CFPB be given oversight over the MLM industry as purveyors of bogus "financial products."

Amway (and MLM groups like it) are offering what they claim is literally an alternative economic system, a type of financial rapture, where the members are delivered into prosperity and all else are doomed to be "wage slaves" and "losers." More often than not, however, MLM organizations like Amway exploit the dreams and expectations of those they attract, by making empty promises. They empty bank accounts and ruin lives by offering the false hope of virtually unlimited wealth.

 

Follow Steven Hassan on Twitter: www.twitter.com/cultexpert