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Imagine betting one billion dollars that a Honda Civic is a kind of car. When activist investor Bill Ackman put that sum behind accusations of an Herbalife pyramid scheme, multi-level marketing and pyramid scheme experts watched with delight as Herbalife stock collapsed. “Informed consumer advocates have known that multi-level marketing or MLMs like Herbalife and Amway are merely product-based pyramid schemes for three decades," said MLM/pyramid scheme expert, Dr. Jon Taylor, by phone this past Friday.
There is a sense of disappointment that what shapes the immediate dialogue on pyramids may not be about what is correct or verifiable, but about what is legal. The need for the two to overlap is strong because the math of a pyramid scheme can be demonstrated with pencil and napkin in under three minutes. The math predicts a complete investment loss for over 99% of consumers conned into "business opportunities" from companies like Herbalife, Amway, Quixtar, Nu Skin, Shaklee or any of the hundreds of US MLMs that currently operate with impunity.
Legislators who oversee the FTC, as well as state attorneys general are given political contributions and promised votes by lobbyists working with the Direct Selling Association (DSA)/MLM lobby, or "pyramid lobby." This is currently legal. Think of FTC as a shepherd we've paid to watch the sheep and the Direct Selling Association or DSA as a wolf able to outbid us.
Are there simple criteria that define a pyramid scheme? There are. Such schemes are characterized by endless chains of recruitment, advancement by recruitment, and by the need to spend money to earn commissions or to advance to a level where money can be made; i.e., “pay to play.” And most of the money paid by the company goes to those at or near the top of the pyramid of participants.
The data on MLMs, or product-based pyramid schemes, is clear and is published on the website mlm-thetruth.com. Perhaps its best summary is by analogy. Start with an object that belongs in the category, "car" like a Honda Civic. Now think of a product, maybe deodorant or a dashboard toy with wobbling head. In 1979, a US court ruled that the product-based pyramid MLM, Amway, was not an illegal pyramid scheme because it’s defenders claimed it had “retail rules” to assure that products were sold or consumed. To use an analogy, after throwing a product in the back seat, we remove the Honda Civic from the category of car and file it as something else. This altered reality, along with influence peddling and deceptive arguments by the DSA/MLM lobby have produced hundreds of millions of victims of MLMs, or product-based pyramid schemes, over the last 30 years.
The reality according to Jon Taylor, PhD., is that the FTC shows no signs of changing its stance or taking an action that would limit profits significantly for members of the Direct Sellers Association such as Herbalife, Quixtar and Shaklee.
The Amway ruling set a precedent analogous to one in which wolves could be allowed to visit the flock if they wore products like collars. Wolves don't wear collars, so consumers are safe because those aren't wolves. It was a legal word game that removed product-based pyramids like Herbalife from the pyramid category, allowing con artists to victimize consumers without fear of prosecution since 1979.
Now, as Herbalife stock re-stabilizes at about $35 per share, Ackmen is betting on the facts while Dr. Taylor argues that facts have not motivated the FTC to protect MLM consumers for more than 30 years.
MLM has grown. There are several hundred MLMs currently operating product-based pyramid schemes in the US. And the FTC – which should be protecting the public from “Unfair and deceptive acts or practices in the marketplace” has been “captured” by the MLM/pyramid lobby to the point of protecting it from having to disclose information that would protect consumers.
Is Herbalife a pyramid? While Ackman is supported by extensive US and international data and by testimony expected from top pyramid experts, the data itself is not new and may not have played a significant role in past FTC decisions.
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