Analysis: Montana/ACN Settlement Displays the MLM Loophole, Once Again

 

Oct 22, 2010

 

The state of Montana played David against the multi-level marketing (MLM) Goliath, ACN, when it recently accused that company of operating a pyramid scheme. ACN’s boastful promoter is the millionaire, Donald Trump, and the scheme’s product, a video phone, is promoted on Trump’s national TV show. ACN claims to have 200,000 sales reps worldwide. Montana is a state with less a million people, a severely limited prosecution budget, and was all by itself in calling ACN out as a pyramid scheme.

 

In this modern battle, unlike the mythological one, Goliath easily won. The state dropped its cease and desist order and then settled the case quickly by blaming its own citizens. Apparently, according to the settlement,  ACN recruiters and distributors – in Montana – did not know how to follow rules. They were also incapable of installing and using ACN’s phones. The resolution? ACN will offer more training to Montana’s uneducated participants. The problem was with Montanans, not ACN’s business model, the settlement indicated.

 

Anyone who has followed MLM’s trajectory from a scorned, shady and often prosecuted corner of the marketplace to a powerful Washington lobby, a force on Wall Street, and a nearly universal scavenger on Main Street has seen this sad spectacle before. Regulators back down and let the MLMs prey upon their citizenry.

 

Despite the Trump endorsements and all the hype about income, Montana’s case against ACN was compelling: virtually all ACN distributors in Montana  had lost money. It is also known that the advertised “average” income of “active” ACN distributors in Canada (where ACN must make an income disclosure) is less than the cost of participating. Additionally, questions have been raised about whether the ACN company is even growing any longer (making  “Get in now!” a deceptive lure) and whether there is market demand for its hyped-up phones (meaning  that purchases may be driven not by direct selling to consumers but  “primarily” by ACN’s solicitations to join the pay plan, i.e., “Buy the phone to make money!”).

 

How do MLMs  escape? Some argue that  political influence-buying (money), high paid and aggressive legal defense and deceptive PR enable MLMs to slip through the bars each time they are arrested. These backroom forces are clearly at work, but there must also be a public rationalization to allow the schemes to plead innocence and to give cover to politicians and regulators who are forced to let the pyramids drain millions from their people who are already struggling in the Great Recession. The public rationalization provides the cover for politicians to give get-out-of-jail-free cards to the schemes and to save face even as they abandon the public to pyramid predators.

 

This public maneuver is the argument and claim that if the money, which is paid in by thousands at the bottom of the MLM pyramid and transferred to the few recruiters at the top, is derived mostly from  “product purchases”, the scheme is miraculously cleansed of the stain of fraud (deception and harm). The pyramid payments to join the scheme  are allowed to be called “sales” and the rewards to the pyramid recruiters are now called “commissions.” Wink, wink, nod, nod.

 

Now, with this rationalization, the essential elements of the pyramid – though they are in plain sight – can be ignored. These include: how the scheme gets its money (by effectively requiring a “purchase” and recruitment  by consumers to participate in the pyramid commission plan);  the false promise that the “endless chain” income plan can work for everyone and forever; the usually exorbitant price of the “product” (sometimes 300-800% over competitive products in stores, with as much as half of the exorbitant price going to recruiter “commisions”); and what happens to the new recruits’ money (transferred to the top 1%).

Also ignored under the cover of the “product” claim: the blatant pyramid structure, sometimes with 10 or more levels; the top-loaded pyramid pay plan with more “commission” per sale transferred to the upper levels than to the person at the bottom who does the work:, the documented 99% loss rates among the consumers who invest: and the deceptive income “testimonials” to lure people in.

 

Effectively, the “product and “sales” claim serves as a legal loophole.

A closer look reveals this loophole to be as much a fiction as the MLM income promises. Paraphrasing Shakespeare, a pyramid scheme would cause just as much harm whether the money is paid for products or for fees. A pyramid scheme is not defined by buying products or not buying products. It is defined by a flawed, unsustainable structure in which investor/salesperson income depends on continuous expansion of new investor/salespeople and on a deceptive sales pitch about income/profits. Pyramids, by design, are deceptive and harmful.  Product-based pyramids cause the same or greater level of harm and make the very same deceptive income claims as those without products, the so-called naked pyramid scheme.

 

It should be remembered that even the “naked” pyramids also have their own “loophole” rationalization. These schemes, often called “cash gifting,”  claim that they too do not charge “fees” to join and do not pay “rewards” for recruiting, which the anti-pyramid laws specify as pyramid requirements. Therefore, they are also not pyramid schemes either, they claim. They simply facilitate gifts! They are just private clubs where people give and receive.  The largest gifting program was called “Women Helping Women.”  More than a million women joined. The scheme claimed everyone could receive an 800% profit on their original gift. Each person who joined made a gift of money and later, as others also made their gifts, the earlier people received gifts from eight others. Wink, wink, nod, nod.

 

As a side note, experts have determined that the cash gifting schemes, which have no products, actually cause less economic harm than the MLMs do, which use products as their fig leaf. More participants in the cash gifting schemes actually can make money (nearly 10% versus less than 1% in the product-based schemes and the average losses per person are less.) Yet, product or no product, the results – massive consumer losses – are essentially the same because the essentials of the pyramid are the same. Both types of schemes also carry out the same deceptions about income and sustainability. Both tell the same lie and rely on the same “endless chain” trick.

 

Without having to know the intricacies of anti-pyramnid laws – since they are not being enforced anyway –  there is a simple test a consumer who is evaluating a MLM scheme that sells a “product” can apply:  If your MLM income depends upon your recruiting more MLM participants (salespeople, distributors, coaches, associates, IBOs, or whatever they are called), then you are in an “endless chain.” Translation: you are going to lose your money and “fail.” Said another way, if you can’t make a sustainable profit from selling your “product” to retail customers, one at a time, day in and day out, without signing them up as  MLM “salespeople” under you, then you are not in a direct selling business; you are in a pyramid recruitment scheme.

 

Some pyramid schemes require you to pay cash to join the pay plan. Some require  you,  in policy or in practice,  to buy goods to get in on the pay plan. Some require both.  Either way, if you need to recruit other “sales” people in order to make a sustainable profit, you are in a pyramid, an “endless chain”, a scam. If you joined at the bottom, you are going to fail and lose your money, probably within one year.  If you don’t, then the people you recruited will lose their money and you will have deceived them. Virtually, all have to lose, since the money they invest and the marketing efforts they expend are the source of the money for the top 1-5%

 

The Montana anti-pyramid law was clear and strong enough. It outlawed MLM schemes in which income is tied “primarily” to recruiting. Try to find an MLM in which the primary requirement for income is not recruiting! The Montana settlement indicates that states are no longer capable of regulating MLM schemes, which are now “too big to prosecute.” Some state regulators openly admit they “can’t afford” to prosecute large pyramid schemes. Other openly acknowledge the MLM lobbying machine that puts pressure on elected regulators prevents law enforcement. Some say they don’t want to anger (and lose the votes of) the misguided consumers who are already invested in the schemes and hope to get their money out by luring in others. Many of them send hate mail to regulators and claim the government is restricting their “freedom.”

 

Seeing the failure of states, will the FTC or the newly formed Consumer Financial Protection Bureau protect the public from predatory recruitment schemes disguised as “business opportunities”? If not, more consumers will need to break their silence and speak out about their losses so others might not have to “fail” also. Main Street will have to protect itself.

For a report on how MLMs work  and how they escape prosecution,  click on the image for a free report. Put the words, “Main Street Bubble” in the subject area.

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