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Direct selling deception

Thirty-one members of the House have recently joined a caucus to “support opportunities for independent work,” according to the Direct Selling Association (DSA). But did the DSA, which lobbies for “multi-level marketing” and organized the so-called “direct selling” caucus, provide these representatives adequate and correct information?  There is a world of difference between “direct selling” and “multi-level marketing” (MLM), which caucus members may not know about or were not told. 

As the ad hoc chairman of the consumer watchdog group,  International Coalition of Consumer Advocates, I signed a letter to each of the caucus members cautioning them against lending their names to “multi-level marketing” and its “work-from-home” proposition.  The letter specifically refers to the legal, securities, and regulatory controversies that MLM is embroiled in and includes a pending petition sent to the FTC. 

{mosads}Following the FTC’s latest anti-pyramid action against a DSA member, the “direct selling” caucus was established by the DSA, possibly for influencing law enforcement.  

Full information would reveal that 99 percent of those who invest in MLM’s famously “unlimited” income proposition actually lose money. The few that gain a profit don’t get it from “direct selling.” 

Correct information would reveal that the MLM company,  “Vemma”, the latest target of  FTC -pyramid scheme prosecutions, was honored by the DSA for “highest standards in business practices and ethics.” More than 200,000 households were being scammed, according to the FTC.
Full disclosure would show that another MLM, Herbalife, also a DSA member, is under investigation by the FTC, SEC and the Dept. of Justice for pyramid allegations. Herbalife is also at the center of Wall Street accusations by short sellers of pyramid fraud and exploitation of vulnerable consumers.  While Vemma specialized in recruiting students, Herbalife aims at struggling Latinos. 

MLMs promise “unlimited” income, not by selling products person-to-person, but from recruiting additional “distributors”, who purchase inventory and then recruit yet more to do the same. Funds expended by later recruits are transferred to earlier ones. Most of the rewards flow to the top 1%. We wrote the caucus members that MLM belongs under the same regulatory spotlight focused on subprime mortgages, toxic securities, payday loans and for-profit colleges. 

In the face of regulatory, investor and consumer scrutiny, MLMs amassed large lobbying and legal defense funds. But now, public awareness has dramatically increased, extraordinary consumer losses have been verified, class action suits have pulled back the curtain and recent federal court decisions bolster law enforcement.  

The International Coalition of Consumer Advocates (ICCA) is asking these thirty-one caucus members to rethink their decision to support a type of business that deceives millions of Americans a year.  At a minimum, they should be aware of several key deceptions that MLM promoters spread: 

Deception 1: Multi-Level Marketing is “direct selling.”

In fact, few MLM participants earn profit from selling to personal customers. Rather, the MLM “income opportunity” is based upon recruiting a “downline” of later participants to an “endless chain” and receiving financial rewards based on what those recruits and their subsequent recruits’ purchase. 

Deception 2: MLMs provide a broad-based income opportunity for families.  

In fact, less than one-percent of all participants in MLMs gains any net profit each year and this is only achieved by a transfer of funds from those that lost. Most quit the schemes within a year. 

Deception 3: Multi-level marketing “sales” are based on consumers seeking the products and most join the sales channel only to purchase the goods for their own use with no income expectation.  

In fact, MLM purchases are incentivized by the “income” plan. The marketing message is about an “extraordinary income opportunity” based on paying fees, buying goods and recruiting others to do the same. 

Deception 4: Short sellers such as William Ackman of Pershing Square present false information to manipulate stock values.  Short selling of MLM companies’ shares is harmful to the public interest. 

The information now debated on Wall Street had been presented for years in lawsuits as well as securities filings and media reports. It parallels thousands of complaints received annually by the FTC against MLMs. The Wall Street controversy is forcing more transparency in the public interest. 

Total consumer losses from MLM solicitations amount to tens of billions each year, far exceeding the harm suffered by victims of the Madoff and similar Ponzi-type schemes.  It’s time for the FTC and other federal agencies to investigate MLM and take action. We asked the caucus members to support greater law enforcement and regulation.

FitzPatrick is the ad hoc chairman of the Steering Committee of the International Coalition of Consumer Advocates and president of Pyramid Scheme FitzPatrick has no financial or lobbying relations with the companies or subjects addressed in this op-ed.


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