History of Pseudo-Law Enforcement at FTC Protects MLM Pyramids and Lures People into them.

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Jan 24, 2020 

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Recent FTC prosecutions of MLMs, Advocare, Nerium/Neora and Success by Health are rightfully applauded by citizens. However, these FTC actions – once again – raise false hopes that the FTC, finally, recognizes the scale of MLM harm and is, finally, going to act decisively. History indicates otherwise and the language of the latest FTC prosecution indicates business as usual.  

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As chronicled in detail in the book, Ponzinomics, during the second terms of the Clinton and Obama Administrations (‘96-2000 and 2012-2016), the FTC also engaged in a flurry of take-downs of mostly smaller, marginal MLMs, of the type of Success by Health, while the MLM “industry” just  expanded and grew bolder. In fact, prosecutions of one MLM typically resulted in top recruiters starting numerous others, modeled exactly on the ones that were shut down.  More recently, under enormous external pressure from a Wall Street hedge fund and media attention, the FTC did prosecute one large MLM, Herbalife, but in the end gave it a pass on pyramid charges, allowing it to continue and to spread.

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In those earlier times, the pattern was obviously partisan. A few prosecutions occurred during Democratic administrations and virtually no prosecutions at all occurred during Republican ones. But public exposure and the emergence of anti-MLM activism around the world now  prevent the FTC from continuing the old policy of going completely silent during this Republican administration, even one led by a famous MLM promoter. 

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The partisan pattern has adapted, but the underlying bi-partisan regulatory policy remains the same: occasionally knocking down a few  smaller or less politically-connected and marginal MLM scams, while always asserting that “MLM” is legal and legitimate. The net effect is to falsely assure people that the MLMs that are not prosecuted – especially the largest ones – are “legitimate” and safe to invest in.

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The misleading and contradictory policy of the FTC is laid out at in the FTC’s press release announcing the most recent prosecution of Success by Health. SBH is described as an “alleged pyramid scheme masquerading as a legitimate multi-level marketing (MLM) business.”  To distinguish “masquerading” MLMs from “legitimate” MLMs, the FTC offers these telling traits of pyramid frauds:

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• Promoters make extravagant promises about your earning potential. 

• Promoters emphasize recruiting new distributors for your sales network as the real way to make money

• Promoters play on your emotions or use high-pressure sales tactics, maybe saying you’ll lose the opportunity if you don’t act now and discouraging you from taking time to study the company. 

• Distributors buy more products than they want to use or can resell, just to stay active in the company or to qualify for bonuses or other rewards

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Has anyone on earth ever encountered an MLM that does not match these traits that the FTC says are hallmarks of a pyramid fraud “masquerading” as MLM?

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But also notice that main characteristic of a pyramid scheme is not on the list at all.  This is the infamous “endless chain” proposition that falsely promises perpetual expansion while it always dooms the vast majority, the “last ones in,” to lose (because they have no downline or an insufficient one).  It also does not inform the public that the promised rewards in a pyramid scheme come from the new recruits. That is why recruiting is emphasized and everyone on the chain must buy products on a quota.  The “reward” money is merely transferred inside the scheme from one large group of newer recruits at the bottom to a few at the top of the recruiting chain. And it does not explain that if the scheme is constantly adding “salespeople”, there can never be a “legitimate” retail sales opportunity. Profitable retailing requires a limit to the number of sellers in any given market.

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Instead, the FTC “warning” focuses on superficial traits about “emotions”, “extravagant promises” and “high pressure.” Those traits are not illegal and could be associated with many other businesses. 

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The net effects of these infrequent, sporadic and seemingly arbitrary prosecutions, along with the confusing and contradictory “warnings” are to enable the MLM “industry” to continue without investigation and to lure more people into any other MLM schemes that are – presumably – legitimate, according to the FTC.