Archive for September, 2011

MLM Scammer: Then Why Hasn’t [My MLM] Been Shut Down by the Authorities?

When an MLM is confronted with the knowledge that their business might be illegal, they ask a simple question, "Why haven't they shut down [My MLM]?"

Depending on the MLM and the alleged illegal activity there are a variety of answers. Typically the agency that would be in charge in keeping most MLMs in check is the FTC. After all they've gone on record as saying, "Not all multilevel marketing plans are legitimate. Some are pyramid schemes.". In addition to that, they've successfully ended Nexgen 3000, BurnLounge, JewelWay and more. Here are some of the reasons why the FTC hasn't the FTC shut down a particular MLM:

FTC doesn't have the Resources Available

If you haven't noticed the United States government is in lot of debt right now - and that's the understatement of the year. The FTC is also very underfunded. This MSNBC article points out that the FTC doesn't have the funding to fight a single company flouting the law, FreeCreditReport.com. There's little money for the FTC to keep up with and fight the hundreds of MLM companies.

Shutting down a company is no easy task. The FTC has to build an airtight case and bring it to the Justice Department for prosecution. The FTC can be gathering information for years. After that, it can take years for a case to be resolved once it gets started - the Nexgen 3000 is one example of that. That's not only a lot of time, but it is a lot of money to lawyers.

The SEC doesn't have the Resources Available

Some MLM supporters suggest that public companies like the SEC would surely look into publicly traded companies like HerbaLife. However, the SEC's resources are limited much like the FTC. Here's a Twitter post from reputable personal finance magazine Kiplinger's:

"With fewer than 4,000 employees, the SEC oversees 11,700 investment advisers, 9,700 mutual funds and ETFs, and 4,500 brokerage firms."

Since Kiplinger's is a very trusted source, I believe the numbers to be accurate. If anyone has contrary data, he/she is free to add it to the comments.

No One is Policing the MLM

In the grand scheme of things, most MLMs are too small to even be bothered with. Even the biggest ones fail to compare to the size of other famous scams that bilked consumers out of billions of dollars. For example, there is the Enron Accounting Scandal that continued for years. If a very public company worth tens of billions of dollars can hide its illegal activity it is clear how the smaller MLM companies can get away with it. (If you get a chance read more about the Enron Scandal by Malcolm Gladwell.)

Another relevant case is the one of Bernie Madoff. You may remember him as the guy who ran a $50 billion dollar Ponzi Scheme for 17 years without being caught. What you might not know is that someone (Harry Markopolos) did tell the SEC, but they wouldn't listen. Most MLMs don't reach the $50 billion dollar range, but even if they did, one could presume that it would be possible to hide the illegal activity for at least 15 years as Madoff did.

The MLMs have Friends Inside the FTC

Robert L. FitzPatrick of Pyramid Scheme Alert has another reason. He notes that in 2000, the Timothy Muris was appointed to chair the FTC by President Bush. At that time, Muris was an anti-trust lawyer whose largest client was Amway - a MLM company. In his report, Main Street Bubble, he details exactly how the current FTC body has ignored decades of previous FTC precedents and neglected to enforce the laws in place. It is an outstanding read and one that all MLM distributors and potential distributors should take the time to grab. It could save them thousands of dollars.

Any of the three reasons above alone are reasonable and logical answers to why a particular MLM hasn't been been shut down by authorities.

Bottom Line: Don't confuse lack of enforcement with legality.

In a town without police officers, it is possible for a thief to get away stealing little old ladies' purses. It doesn't mean that it is legal to do so.

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MLM Scam

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The MLM Gas Station and $8/Gallon Gas

I've noticed that many products are expensive. By expensive, I mean priced at 2 or 3 times what the average consumer would pay. Some products like MonaVie are priced at 20 times (ounce for ounce) the price of competing juices. Other products like Protandim are similar much cheaper if you simply buy the ingredients separately.

Many MLM distributors say, "So what? Tiffany's jewelery is expensive and that's not a scam." I think you pay quite a premium for that little blue box and the brand name. However, it got me thinking, "How would an MLM gas station work?"

Imagine a gas station that charges $8 a gallon for gas next to one that charges $3. The $8/gallon gas station promises to pay you 50 cents a gallon for each person you convince to also fill up at the same $8 gas station. The catch is that you must also fill up at the gas station to earn the commissions.

One could look at this gas station and say, "Hey if I get 16 people to sign up, I get free gas. This is great! I'm going to publicize this all over the place and give it my highest recommendation because free gas is great... and if I can get 20 people to sign up, I'll actually be making money. Whoa!" That's the view that most MLM distributors have.

A more analytical, non-emotional view might look at the big picture and say, "If I recruit 16 people to buy $8 gas, they are paying a combined $128 a gallon so that I can get my gas for free. However, if all 17 of us just went across the street to the $3 a gallon place, we'd only pay a combined $51 for our gas. Yes, I wouldn't get my gas for free. I'd have to pay $3 like everyone else, but at the same time, I saved each of the 16 people $5 a gallon by not participating in the $8/gallon scheme."

Let's say that we go with the former view and try to get gas for free. It turns out that each of those 16 people have to recruit 16 people to get their free gas. That means that 256 people will have to be involved. And those 256 people have to recruit 16 more people to get their gas for free, bringing 4,096 people in. The next level has 65,536 people. If your city is sized like mine, there is no longer anyone left to recruit. That last group of some 61,000+ people are left footing the whole $8 gas so that approximately 4,300 can get their gas for free. A lot of the town's money just got funneled into the hands of the owner of the gas station with a few of the participants receiving a pittance.

A number of the people in the town will see the $8 gas for the scam that it is and stay on the sidelines completely. It will impossible to recruit these people so the scheme runs out of people even before it gets to the whole town.

So who thinks this $8 gas station is a scam? The gas station owner isn't going to admit it's a scam - he's getting exceptional profits and doesn't want to see it stop. The person trying to recruit others isn't going to admit it's a scam - their plan is to get people involved so that they can free gas.

What about the outsider watching these people pay $6 for their gas week after week because they were only able to recruit 4 people? He's likely to say, "These people are getting scammed. They could be paying $3." Most outsiders just continue about their day because they've got a lot of other things to do. Why care about the people getting scammed? It's their own fault for being dumb.

However, occasionally an outsider really cares about people and tries to educate them about what they are involved in. That leads to websites like this and articles like this one.

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MLM Scam: The Industry is a X Billion Dollar Industry

One popular saying by distributors is that their product is in a billion dollar industry. It is their attempt to explain why their particular product is going to change the world. Usually, I see it in the context of the a health or nutritional product. For example, I'll see someone claim that a protein powders are a $5 billion dollar business... or I'll see someone claim that energy drinks are a $20 billion dollar business. That gives the illusion that there is a demand for their particular product.

Here are a few things to think about with regard to these claims:

  • The numbers used in such claims rarely backed up by the MLM distributor. Typically these numbers are just passed from the upline. Sometimes they are taken out of context and other times they are entirely fictional (see the false claim that Harvard Business School teaches MLM).
  • The industries with all those sales are usually quite crowded. For example, a person can go into a grocery and get any number of energy drinks. I could create a new soda, but I shouldn't expect success just because Coke, Pepsi, and others sell a lot of soda. In fact, because of the competition there, I'm less likely to be successful with my new soda.
  • A vast majority of people tend to shop at retail or grocery stores. If they are interested in energy drinks, they typically pick them up along with their milk, eggs, and Captain Crunch. Any product that isn't available on that shelf space is excluding themselves from more than 99.9% of the addressable market.

If you hear this kind of claim, it's likely that the MLM distributor is trying to trick you into thinking that there's a good business opportunity.

Update: I noticed that Cnet.com addresses this phenomenon with their article 1 percent of a gajillion dollars!. Here's a quote:

"The most common example of spreadsheet lock-in that I see goes like this: Company X is attacking a well-established, large market. The product is great. Early beta testers love it. The founders know that even a slight toehold in the market will count as a success. So up comes the Delusion Slide in their pitch deck: A chart showing how they're going to get to 1 percent of market share in some mathematically plausible period of time based on their current growth, with a revenue number in the hundreds of millions of dollars based on that.

Most of them never get there. The paradox, and the delusion, is that 1 percent is a lot for you but just a little for the market; that you can skim off that 1 percent and no one will be the wiser.

It does not work that way. If your fortune would be made on the 1 percent, chances are somebody else's will be lost on it. You think they're going to let it go easily?"

Except in the world of MLM, the product is usually not any better than you can get elsewhere and it is a lot more expensive. It makes grabbing any meaningful percentage impossible.

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