Anti-MLM Zealots – Part VI

December 27, 2012 Leave a Comment

MLMSurvivor.com
By Len Clements © 2005

        Lots of people are anti-MLM. But few deserve the title of Anti-MLM Zealot. Your average anti-MLMer usually falls into one of two camps: There are those who failed at the business and discovered that there’s scapegoats galore which to assuage their ego – my sponsor didn’t support me, the products were too expensive, the pay plan was too confusing, Mars was in retrograde (no kidding, actually heard that one once), or whatever. No one ever seems to fail at MLM because they just weren’t very good at it. Then there are those who heard that MLM is bad, and instead of forming their own opinion, based on their own evaluation, they choose to adopt the other person’s negative opinion as their own. And the other person’s opinion usually came from someone else who never formed their own opinion – the opinion is rarely passed on unsolicited. So, to answer a common question I’m getting about this series, that’s the key distinction between your run-of-the-mill MLM basher and a full blown Anti-MLM Zealot. The Zealot wants to tell you their opinion of MLM whether you want it or not. They want to warn the world, to save us all from this horrible scam. And when we won’t listen (all ten million of us), they try to save us from ourselves by getting our state and federal government to silence the siren song of MLM that is so violently smashing our dreams into the rocks. When our proverbial ship comes in, the lowly MLM basher will simply tell you not to board it. The Anti-MLM Zealot will try to sink the ship, court-martial the Captain, imprison the crew, burn down the shipyard, and level every port-of-call that allowed it to anchor.

zeal·ot n. 1. A fanatically committed person. 2. A fervent and even militant proponent or opponent of something.

       There are only four bona-fide Anti-MLM Zealots in the U.S. today (for such an allegedly vile and pervasive business you’d think there would be more). Dean Van Druff is perhaps the least zealous among them, but his disjointed, unresearched article “What’s Wrong With Multilevel Marketing” is likely the most read piece of anti-MLM propaganda ever created. That’s why I rebutted his work in part one of this series. Robert FitzPatrick’s book “False Profits” seems to be the definitive work within the anti-MLM arena which is why he has been the subject of the last three segments of this series. Jon Taylor’s anti-MLM efforts are by far the most prolific, culminating in his 40,000 word manifesto titled “Product Based Pyramid Schemes.” That’s why I’ll be focusing on his work next.

MLM Survivors

       But let’s get back to our current subject, alias Ruth Carter and her “MLM Survivors” web site. Last issue I related her experience as an Amway distributor which she portrays as a miserable, depressing, and expensive one. A fifteen year relationship culminating in her turning hostile witness and writing a book called “Amway Motivational Organizations: Behind the Smoke & Mirrors.” In her book she suggests that “mind control” techniques were used on her, and that Amway Motivational Organizations (AMOs) were cult-like. When so many people coming from the same MLM support system claim to have lost so much for so long, and just couldn’t stop doing it, I do feel there is reason for genuine concern. So when she started her on line support group in the Fall of 1997 I admit to being a reluctant fan. Reluctant only because I felt she was unfairly stirring all Amway reps (now called Quixtar) into the same pot. Many do not support an AMO, and Amway corporate has clearly declared that their tools and events are not required. And she didn’t call it AmwaySurvivor.com, she called it MLMSurvivor.com. But her failure to recognize the dichotomy between Amway AMOs and the rest of the MLM industry didn’t end there.
       In spite of the fact that virtually 90% of her site’s content and message board posts pertain to Amway/Quixtar, she and her co-moderators are quick to attack, viciously, any mentioned MLM company or pro-MLM participant. “Ruth” offers a pull down menu on her home page where you can look up “news” (dirt) about specific “multilevel marketing” programs. Based on a phone verified survey conducted by the Network Marketing Business Journal, there are 2,100 MLM companies operating in the United States. Carter has 21 on her little hit list. Two are Amway and Quixtar (the same company, but hey, it makes the list look longer), another is an expired Amway distributor group made up of terminated Amway Diamonds (which she ironically seems to support in spite of the fact they were terminated because they tried to multilevel market the tapes and tools – which would have violated anti-pyramid law!). Of the remaining 19 one has never operated in the U.S., and ten were blatant illegal pyramids, not MLM companies, which have all been shut down. Then there’s Equinox, of course, it’s spin-off Trek Alliance, and The Tax People – which have also all been shut down. Within the entire content of her MLM survivor web site only six existing, actual MLM companies are even mentioned besides Amway/Quixtar. And even the negative information she provides about most of these six appears to have been scraped from the bottom of the barrel. Herbalife’s listing links to only a press release about founder Mark Hughes’ death. Melaleuca’s links to a law suit filed by some ex-distributors alleging fraud – which Melaleuca won! Nu Skin links to nothing more than a petition to the FTC asking them to examine Nu Skin’s adherence to a 1993 Consent Order – authored by the afore mention Jon Taylor, which the FTC has so far completely ignored.
       Most of the action is on their Yahoo message board, which is dictated over by Ruth Carter herself, under the name “nomore_scamz”, and Lindy Mack, as “PW.” One of the most active posters goes by the screen name “freethinker4.” After the Dateline segment on Quixtar and AMOs which aired last October, PW and freethinker4 revealed themselves as the husband and wife featured most prominently on the show. Yes, they too are ex-Amway reps (Ruth was also interviewed by Dateline, but for some reason her segment hit the cutting room floor – perhaps the lady doth protest too much?). The board lists over 3,200 members, but most of the activity seems to come from the same dozen or so people, and the number of posts has been dropping steadily over the last 18 months (from over 1,300 to 337 in February).
       It’s fairly common for folks who are considering MLM to join the forum to investigate the opportunity they are considering. Without exception they are told that all MLM companies are scams and should be unilaterally avoided. If a pro-MLMer dare wander into their domain they are immediately swarmed upon like killer bees. And the venom can be disturbingly toxic. And should anyone dare post corrections to the rampant flow of misleading or outright fraudulent anti-MLM information that’s posted there, they are tolerated for only as long as Ruth and PW feel they can win the point. Once undeniable proof is offered, or you simply offer up enough logic to make them look foolish, your post is deleted and you are permanently banned from the forum. Then they gloat over how pro-MLMers never seem to be able to post proof of our claims. Trust me, I know.
       Ruth and I first got into it last year when she posted material claiming that the DSA’s anti-Pyramid bill (HR 1220 – “Act to Prohibit Pyramid Schemes”) would actually “legalize product based pyramid schemes” and would have protected companies like Equinox from prosecution. Sound familiar? The term “product based pyramid schemes” is an invention all Jon Taylor’s, and the odd idea that the bill would have protected previously closed down companies originated with Robert FitzPatrick (and was debunked in Part IV of this series). I asked Ruth at the time if she had ever developed any of her own opinions about MLM in general, or was she just parroting FitzPatrick and Taylor? She claimed to have done her own research, of course, yet when pressed to address any issue outside the scope of Amway she continues to routinely reference the work of FitzPatrick and Taylor. I provided a respectful and thorough rebuttal to her erroneous comments as to the DSA bill and to her credit she allowed the response to post (all posts are screened by her and PW). But then, she still thought she had a valid comeback, which she eventually posted several days later. Then due to a death in my immediate family I was taken away from the debate for several days, only to return and find three posts from Ruth rhetorically wondering where I had gone, and challenging me to respond. She was definitely confident in her position in spite of the fact that most of it could be easily, logically, mathematically, and verifiably proven false – and it was in my response. Her follow up was a short comment about a couple of meaningless points, followed by a curt “That’s as far as I’m going with this.” I was then notified that my posting privileges were being revoked. One of her own board members then posted the comment; “Ruth, I would have thought you would have more to say about his response, especially since you asked for it three different times. As I read his response, he appeared to make some valid points.” This poster had obviously not figured out yet that the board moderators don’t respond to “valid points” that support MLM – they censor them.
       Before I was blacklisted I was able to answer some attacks by other board members, such as freethinker4’s totally baseless, unprovoked accusation that I sell my company’s products by making wild claims. Now, I’m a pretty calm guy, but I do have my hot buttons. One is an attack on my ethics. Another is wild product claims. Accuse me of being unethical by making wild product claims and watch out! I tried to explain to her as calmly as I could my loathing for such claims, which stemmed from my Dad just dieing from Emphysema, my Mom’s chronic ulcers, my Grandmother’s Alzheimer’s, and my brother’s Crohne’s disease – and all the garbage that’s out there claiming they can all be cured (I once watched a friend die of cancer while chugging every “natural” remedy she could find – for around $40 a bottle). Or worse, the suggestion that my Dad’s death could have been prevented had he (or I) been more “open minded” to all these pseudo-science based alternative treatments. I also directed her to the several articles I’ve written on my web site blasting such practices in MLM, and to a display ad I had running that said “NO! Our products don’t cure every disease known to science!” right in the ad. She also suggested that I “make more money selling (my) success system than selling products.” This is typical “survivor” modus operandi – if someone did it to them, then we all must do it to everybody. I pointed out that I offered my system for free and directed her to the online evidence. But rather than apologizing for misjudging me and showing even a modicum of compassion or empathy for my personal situation (she’s a registered nurse – you’d think it would come naturally), her response was disturbingly vitriolic. This wasn’t someone who was just being defensive or too egotistical to admit she was wrong. This was a person who seemed to be filled with anger and hatred beyond reason. What’s more, other board members were quick to agree with her accusations and supported her horrid retort. The point behind describing the condition of my family’s health was clearly not to gain sympathy, but the fact I received none told me a lot about the type people I was dealing with.
       Ruth was never so hateful, just infuriatingly evasive. She has a keen ability to sense when an argument is about to turn against her then lead you light-years away from the point you’re trying to make. For example, I made the claim, imbedded within a much larger more poignant issue, that a high failure rate among participants does not inherently make a profession dishonest, and that the majority of people who attempt to be successful doctors, lawyers, actors, politicians, or baseball players also fail, yet no one claims these occupations are scams. Rather than address the main issue being debated, she responded with her favorite comeback: “Unsubstantiated anecdotal claims. Where’s your evidence?” Countless times Ruth has used this clever “Prove it” response to avoid having to provide a response. Even in cases like this, when asking someone to show evidence that most who attempt to become pro baseball players fail at it makes her look astoundingly foolish and desperate. She later stated that she “might” grant me actors and baseball players, but if I could not support my claim regarding successful doctors and lawyers then “it rather spoils your argument.”
       But, couldn’t I have made the same point just as effectively by leaving out doctors and lawyers and using the other three professions? And what do you suppose she did after I went through the tedious, time wasting process of digging up the data to prove my claim about doctors and lawyers? That’s right – she completely ignored my response and dropped the point. To appreciate the silliness of Ruth’s penchant for requiring proof, here are some other statements she demanded “verifiable evidence” of: “You get out of it what you put into it” (how would one even begin to “verify” this?); “so many people (on the Survivor message board) complain and moan” (she demanded a total count of people involved, and the number who were complaining); and “There are goods and bads in any business” (she actually asked for “facts” to back up that claim!). One pro-MLM poster claimed he made over $100,000 last year at age 30, and Ruth responded by demanding to see his tax return and a copy of his birth certificate! According to the forum’s co-dictator “PW,” only “documentation can serve as evidence.” Yet, when it comes to virtually all of their anti-MLM data, personal testimony and hear-say are entirely acceptable. But then, he openly admits, without the slightest reservation; “There is a double standard with regard to pro-MLMers… argumentation in favor of MLM are not permitted here.”

        “Fairness is NOT one of the foundations of the MLM Survivors Club.”
           – Lindy “PW” Mack, Message Board Moderator

        “There is no requirement of balance in this club, numbskull… Give it up, troll.”
           – Vicki “Freethinker4” Mack, Message Board participant

       Their club rules also state “Rudeness, abusiveness, name calling and the like will not be tolerated.” Guess there’s a “double standard” on that one, too.
       Ruth also states that making claims “without verifiable proof” is a violation of “club rules.” But when I ask her to provide evidence of her claims, such as “fewer than 1% of MLM participants ever make a profit,” you’ll hear only crickets chirping. Unless it involves facts that FitzPatrick or Taylor have already published, she’s lost. And often times she’ll cite claims made by these two (such as the 1% claim) which even they don’t have evidence of – they just pulled it out of thin air. A new board member once asked if anyone had any “negative information” on Usana. Ruth responded that if she hadn’t found any, “you haven’t looked very hard.” Yet, in spite of the alleged ease in finding it, Ruth was unable to identify any of it. The standard of proof she requires of pro-MLMers are so high it borders on the absurd, but if it supports her anti-MLM position there seems to be virtually no standards at all. “Unsubstantiated” and “anecdotal” would describe at least 87.364% of the anti-MLM claims made in her message board. Okay, I didn’t really compute that number out – at least not to three decimal places – but I’m sure Ruth would ask for it!
       If Ruth’s “Prove it” dodge should ever fail, her Plan B is to play dumb. While debating the requirement that MLM companies sell sales aids “at cost,” which I said was true “based on legal precedent”, she first asked for the precedent, of course (I supplied it, she ignored it) then actually said this: “… ‘at cost’ covers a pretty gray area. If I manufacture a bunch of tapes at a cost of 60 cents apiece, and sell them… for $1.00, what is ‘at cost’?” I contacted three of the top economist in the country and we researched and debated her question for several hours. The consensus was that “at cost” in her example would probably be sixty cents! The “at a cost of 60 cents” part was a big clue.

        sar·casm n. 1. A mocking or contemptuously ironic remark.

       The folly of the MLM Survivor message board is far too extensive to cover in just one segment. Next issue I’ll explain how surviving a bad MLM experience is analogous to surviving The Holocaust, according to one MLM survivor. And I’ll tell you what facts I posted that got me canned a second time from their board. I saved the best anecdotes for last. We’re going to have some fun, so stick around!
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Anti-MLM Zealots – Part V

December 27, 2012 Leave a Comment

Ruth Carter
By Len Clements © 2005

        If you haven’t been following this series you should really get the back issues and study up on your opponent. Not your opponent who’s trying to enroll your prospect into their opportunity, but your opponent who’s trying hard to make sure no one ever enrolls anyone into their opportunity!
        For what ever reason, there are a number of folks out there who are anti-MLM. In my experience, I’ve found most have a negative opinion of this business because they’ve been told to. Someone else they know, usually someone who has failed at it, formed this negative opinion and they’ve chosen to adopt it as their own. And when they gain the strength of mind to form their own opinion, based on their own investigation, the negativity usually evaporates.

        Then there are those more passionate Anti-MLM Zealots, like Robert FitzPatrick (author of the books “False Profits” and “Pyramid Nation”) who at least try to go beyond just anecdotal evidence in making their case against network marketing. I explained why he was wrong in the last three issues. And then there’s guys like Dean Van Druff (author of the article “What’s Wrong With Multilevel Marketing”) who openly admit they’ve performed virtually no investigation into the subject matter at all. His was a “theoretical” analyses. In other words, he guessed at it. I explained why he guessed wrong in the first segment of this series. In a future segment I’ll deconstruct the prolific anti-MLM efforts of Jon Taylor. Jon’s case is an odd one. He actually claims he was “successful” in MLM, yet still claims none of you will be.

Behind The Smoke & Mirrors – Ruth Carter

        So now we come to Ms. Ruth Carter. Ruth is a rare breed of Anti-MLM Zealot in that she not only, God forbid, actually participated in MLM, she was genuinely burned by it. As her story goes, which she’s chronicled in her book “Behind the Smoke & Mirrors,” she joined Amway back in 1982 after being invited to a few meetings. She recounts her feelings of curious apprehension, and how she had wondered why the speaker at one meeting was driving such a beat up old car when he was supposed to be so successful? Why was he serving store bought cookies and drinks in Styrofoam cups? Why was his wife, who was obviously home, never present? Why was there such “ludicrous” passion and excitement over a company that just sold some “basic household and personal care items, and supplied name brand product through a catalog”? However, it was not until about seven years later (of her 13 “core” years in the business) that she finally “neglected to leave my brain at the door” and started to look critically at her experience.
        This followed years of doing everything by the book: attending all the meetings (at first a 600 mile round trip), spending thousands of dollars on all the tapes and books she was told to purchase, attending all the major functions, showing the plan, recruiting people, and selling some products. Yet, she also describes her arduous financial struggles, debilitating bouts of depression, and poor social life (one date was “thoroughly appalled” after attending one meeting with her, and another claimed he had just lost his marriage over his wife’s Amway involvement – Ruth doesn’t elaborate, but I suspect that date didn’t go well). Six years into the business, with two children from a previous marriage, her savings depleted, no regular job, and a new husband who had tried in vain to get behind her Amway business, but who was now “questioning everything” about it causing constant arguments, she decided to have another child. Her husband wanted children, and she announced that she wouldn’t even consider having another child unless they were building the business so she could be a stay-at-home mom. He agreed to “do whatever it takes.” She then became pregnant – and their business “ground to a halt.”
        Several months later, Ruth’s loyalty and efforts finally attracted the attention of an upline Diamond who wanted her to come to work in his office. Understand, in the Amway world, such an offer is analogous to a real estate agent being asked to intern for Donald Trump, or a Catholic priest being asked to work directly with the Pope. Amway Diamonds are more than just edified by their downlines, they’re practically deified. However, this is when, as the story goes, Ruth was exposed to the inner workings of an AMO, or “Amway Motivational Organization” (better known as the “tapes & tools” business). She alleges a lucid moment occurred when she discovered that only 5% of the Diamond’s income came from his downline overrides. The rest came from tools and functions. She said she felt sick that she had “helped him steal from his distributors.” Actually, steeling would be offering them motivational tools, taking their money, then not sending motivational tools. Offering them, taking their money, then sending them exactly what they willingly ordered would be the opposite of stealing. But this is Ruth’s story.
        So, after seeing this “evidence” that was “right in front of (her) nose” for so long, and after visiting several anti-Amway web sites, she decided to turn hostile witness – and launched her own web site. It’s called MLMSurvivor.com.
        This is probably a good time to address a common question I receive regarding this series: Why do I mention the Anti-MLM Zealot’s material by name? Doesn’t that increase the exposure to their work? Fair question. The answer is simple. I have no fear of you being exposed to their side of the story. I firmly believe this industry can stand up to any scrutiny. Only the side with the weakest argument doesn’t want you to compare both sides. Only the side that bases their case on anecdotal, theoretical, sometimes even completely fabricated arguments doesn’t want you to be exposed to all the facts. Like Ruth and her cohorts at MLMSurvivor.com, for example. We’ll get to her web site later.
        But first, what about this book? It does seem to paint a pretty compelling, dissuasive story against, well, at last Amway (now operating under the name of Quixtar and their parent company Alticor – however, her book was written in 1999 and she refers to them as Amway throughout, therefore I will as well). Indeed, the subtitle of her book is “Amway Motivational Organizations.” At least 90% of the material and discussions on her web site directly or indirectly pertain to Amway. Robert FitzPatrick, who’s testimonial consumes the entire back cover of her book, congratulates her for her “courage” to put the truth in print regarding the Amway business (an ironic accolade considering “Ruth Carter” hides behind a pseudonym – that’s not her real name).
        For the record, I also dislike the manner in which some AMOs operate. I am within the much larger MLM camp that believes you don’t have to spend thousands of dollars on books, tapes, videos and numerous meetings and functions. What is offered to distributors should be sold at, or even below cost. This would allow more distributors access to the material so the producer of the material makes their money by the resulting increased sales activity. That way the seller doesn’t make money by simply selling the tools, they only make money if the tools actually help the buyer make money.
        Having said that, let’s be clear about a few things. First, these tools Ruth is referring to are not offered by Amway, but by Diamond distributors (which she does acknowledge), and are not sold on a multilevel basis (in fact, Amway has terminated Diamonds who tried to do this). Amway corporate makes very clear these tools are totally optional and have no barring on any qualification in the compensation plan. Thousands of Amway reps are not involved in an AMO. Also, the Diamond distributor she uses as a case study in her book did, in fact, have gross income from Amway bonuses less than 5% of his total gross income, but this Diamond also incurred $2.6 million in expenses while operating his extensive tools and training business. His Amway income was actually 30% of his total net income. While I agree it should certainly be more, citing the 5% figure seems disingenuous. Also, Ruth provides a breakdown of the suggested training event costs for a year and it totals $1,040 – for forty-two events! That’s about the same cost as two Tony Robbins seminars. At an average of $24 per event, it’s actually not a bad deal – as long as you don’t go to all of them!
        Carter states that the training tapes are repetitive. “After you’ve heard a dozen or so teaching tapes, you’ve pretty much heard all the information they offer. So why subscribe to a Standing Order Tape (SOT) and buy a tape per week?” Good question – so why did she? She tries to make a case that the AMOs are cult-like in their use of brainwashing tactics. She devotes 36 of her 157 pages to a discussion of cults and “mind control”. This explains her devotion for so many years to both a financially and emotionally draining experience. This also explains why, when told to spend thousands on motivational books, tapes, videos, and meetings, she couldn’t simply say, No thanks (a perfectly valid option). This rationalizes her commitment to a program that allegedly encourages the shunning of friends and family who are unsupportive, and so severely damages such relationships. Yet, she paradoxically claims there are “millions of distributors who have walked away” from their Amway business. Millions. By Ruth’s own accounting (based on published data), 59% of all current Amway reps are inactive (that is, somehow found the will power to stop). She refers to “Prisoners of MLM” who have been psychologically manipulated into continuing, in spite of the notoriously high attrition rate throughout the MLM industry. Such statements seem to border on the absurd considering the extreme level of ease so many others seem to have in leaving their MLM program. In fact, it’s often too easy! She describes the many people whom she introduced the business to in much the same way it was introduced to her who immediately rejected it (or even, as described earlier, were “appalled” by their first introduction). What did they see that she failed to see? She does candidly questions her own “stupidity” in the beginning.
        While it may seem easy to just dismiss her “I did it because they told me to” explanation with the common Mom line “If they told you to jump off a bridge, would you do it?” (my Mom used “bridge,” yours probably used the more common “cliff”). However, there are a very disproportionate number of folks who get involved in these Amway Motivational Organizations, lose a lot of money and friends, and just can’t seem to stop. I think the alleged use of mind control techniques by these groups deserves consideration and should not be summarily dismissed. Some people are more susceptible to these tactics than others (a sign of emotional weakness and lack of common sense perhaps, but certainly not intelligence), and in my opinion it does appear most AMO leaders are playing to that demographic. But let’s be clear: we are talking about a faction within Amway’s distributor ranks, not all distributor groups within Amway. And we are not talking about Amway corporate, who seem to be going out of their way to inform new reps of the true average income potential of the opportunity, and that the tools and training are completely optional, totally voluntary purchases. In fact, about two years before Ruth wrote her book Amway began requiring renewing reps to sign an agreement stating “I understand that the purchase of Business Support Materials is always optional.” If they choose to purchase such collateral material, they must sign an arbitration agreement. In their policies (which all reps must agree to) they clearly state:

“If you sponsor others, you have an obligation to train and motivate them whether or not they choose to buy Business Support Material. All distributors are free to change their volume of purchase of such items, to cancel standing orders, or to cease such purchases at any time without threats, pressure, or retaliation.”

        Ruth completely acknowledges all this, and the provision that anyone who sells such tools must agree to buy them back within 180 days, yet it appears to have made no impression on her at all. She claims this provision is “completely ignored by distributors in the field.” Her evidence? Two e-mails she received from “disillusioned” ex-distributors.
        Ms. Carter also gratuitously, and clumsily, attempts to make a case that Amway is now operating as a pyramid scheme. Like Robert FitzPatrick, she believes a high percentage of personal consumption among distributors is somehow indicative of an illegal pyramid (according to the FTC, it’s not, which was proven in the last installment). But it’s not so much what she’s claiming as how. Here’s her statement, verbatim: “Virtually no product is sold at retail today in North America – actual retail sales comprise only about 18% of all Amway sales.” According to Ruth, 18% = 0%.
        She makes the sensationalistic claim later in her book that “As financial and mental-health professionals become more familiar with the devastation that follows in the wake of many MLM opportunities, they are becoming better resources for helping people recover from AMO involvement.” Here in lies the crux of Carter’s ignorant, illogical, campaign against the entire MLM industry – she thinks the experiences of a subset of AMO members, themselves a subset of the entire Amway organization, which is a subset of the entire MLM industry, is indicative of how all MLM programs operate. All this in spite of the easily verifiable fact that such tools & training systems are virtually exclusive to Amway. No other MLM company employs such Motivational Organizations. Not a single one. And the “devastation” she refers to that requires the care of a mental-health professional is overly melodramatic and hyperbole even within Amway (certainly some folks have been devastated, but they are a small, vocal minority who file law suits and build web sites). I’ve known literally thousands of networkers over the last 14 years and can’t think of a single Oxyfresh, New Vision, Freelife or Cell Tech distributors who ever needed psychological counseling due to their experience. Every failed distributor I’ve ever known just quit, moved on, and got over it.
        Ruth Carter’s book is not what classifies her as an “Anti-MLM Zealot.” Obviously, she was genuinely traumatized by her experience. If writing a book and starting an on-line “survivor’s” support group for others with similar experiences is cathartic for her and others, more power to her. I sincerely mean that. But her agenda is not so benign. She has, once again it appears, been brainwashed into believing all MLM opportunities are evil, vile, scum. Her experience in this one organization within this one company was horrible, so they all must be as horrible. She is now so blinded by her loathing for all things MLM that she didn’t create AmwaySurvivor.com, she launched MLMSurvivor.com. This web site is where the real fun begins. Don’t miss the next issue!
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Anti-MLM Zealots – Part IV

December 27, 2012 Leave a Comment

Robert FitzPatrick
By Len Clements © 2005

        If you’ve ever read the works of some of the most prolific Anti-MLM Zealots, such as Dean Van Druff (What’s Wrong With Multilevel Marketing), Ruth Carter (Behind the Smoke & Mirrors), Jon Taylor (Product Based Pyramid Schemes) and Robert Fitzpatrick (False Profits), you are surely and profoundly insulted. After all, if you’re failing to reach your income goal, you are a gullible victim of a scam. If you’re succeeding, you are the greedy, heartless perpetrator of a scam. And your success was not due to hard work and perseverance, you were just lucky. And if you succeeded without frontloading anyone, without obnoxiously pestering your friends and family, without making ridiculous income or product claims, and without depleting your bank account on superfluous tools and meetings, some will flat out deny you even exist! And if you succeeded in spite of starting at the bottom of an already mature MLM opportunity?  Forget it.  You’re just a bold faced liar.
        I do exist.  And I’m profoundly insulted.
        That’s why I’ve decided to fight back. And thanks to publications like the Network Marketing Business Journal and the MLM Insider I have a forum much larger than theirs to make my case – our case – that they are flat out wrong.
        I’ll continue to tell you why they’re wrong here in the MLM Insider over the next several issues. The subject of Part 1 was Dean Van Druff, the author of the well traveled article “What’s Wrong With Multilevel Marketing.” In Part 2 I started in on Robert FitzPatrick, author of the book “False Profits.” FitzPatrick has got it wrong on multiple levels (pun intended) so it’ll take three segments to cover even the highlights. The second segment was last issue.

        Picking up where we left off, about half way through FitzPatrick’s latest work “Pyramid Nation,” he makes the outlandish claim that the “pyramid scheme industry,” (that’s us) led by the Direct Selling Association, has “turned it’s attention to ridding the country of effective state statutes against pyramid schemes.” Obviously, the DSA is not trying to get the Airplane Game legalized. What he is referring to is the lobbying effort to get states, and the FTC, to formally recognize personally consumed products by distributors as legally commissionable. The Anti-MLM Zealot’s best friend, the 9th Circuit Court of Appeals, declared that only retailed products to non-participants was legally commissionable in the 1994 Webster vs. Omnitrition case, and this is the backbone of Fitzpatrick’s case as well. Forget the fact that this was only dicta (an unsolicited opinion) offered by the most overturned appeals court in the country, that it created no law, that the case only involved dismissing a summary judgment by a lower court (in favor of Omnitrition), or that Omnitrition’s practices were never officially ruled illegal by a jury. Nonetheless, this concept of paying commissions on internal consumption is the basis for FitzPatrick’s claim that virtually all MLM companies are operating illegally in many states. Of course, he looks to other cases and statutes besides Omnitrition to make his case. For example, he also provides Wisconsin’s statute which “prohibits schemes, in which a person, upon a condition that he or she makes an investment, is granted a license to recruit, for profit, additional investors…”. But, this is why all MLMs are legal in Wisconsin! No MLM company offers the right to enroll others on the “condition” of an investment. Not one. Sure, some require an at-cost distributor kit for around 20 bucks. But a product purchase in never required as a condition to recruit others (to be a distributor). It’s never even a requirement to qualify for commission (personal sales volume is required, but there is never a requirement that you must purchase the required volume yourself). This is a subtle but critical distinction that apparently even a court certified “pyramid scheme expert” can miss.
        Keeping with the same theme, he next describes how the DSA is lobbying for a federal statute (HR 1220 – “Act to Prohibit Pyramid Schemes”) that would formally declare products purchased by distributors as legally commissionable. Therefore, he declares, this bill as pro-pyramid scheme. In fact, this bill “wipes out a defining characteristic used by prosecutors to identify product-based pyramid schemes.” He even goes so far as to state that this bill would have allowed Equinox and other such schemes to remain in business instead of being shut down. Here’s what he somehow missed (or has chosen to ignore): According to the DSA (see Press release 4/14/03 at www.dsa.org) this bill “would provide an additional federal right of action and would not preempt any state anti-pyramid laws.” Furthermore, the bill itself contains language that clearly defines illegal pyramids as those “that finance returns to participants through sums taken from newly attracted participants” (Sec. 2.1.a); and one “in which a participant gives consideration for the right to receive compensation that is derived primarily from the recruitment of other persons as participants in the plan or operation, rather than from the sales of goods, services, or intangible property to participants or by participants to others” (Sec. 3.11). It further defines the illegal act of “Inventory Loading” as encouraging “independent salespersons to purchase inventory in an amount that unreasonably exceeds that which the salesperson can expect to resell for ultimate consumption, or to use or consume, in a reasonable time period” (Sec. 3.7). Even with the provision to include sales to “participants,” this bill obviously would not have protected Equinox, or any successfully prosecuted pyramid. The front loading section alone would have nailed them. Plus, the Illegal Pyramid definition section still addresses what has actually been the “defining characteristic” of an illegal pyramid, which is the motive for distributor purchases, not the existence or amount of distributor purchases. If a significant amount of product is purchased only by new distributors as a token act to qualify in the pay plan (as opposed to their genuine desire for the product) Section 2.1.a above would absolutely still apply.
        The entire statute is only two pages long. FitzPatrick’s attack on it is longer than the bill itself – yet he seems to have somehow completely missed, or misinterpreted, all three of these pertinent sections. This bill is clearly not designed to protect illegal pyramids. It’s designed to protect MLM companies who have a lot of distributors who genuinely love their products and would be purchasing them regardless of the pay plan (thus have a lot of distributors purchasing the products for their own use), or those companies who have little or no barrier to entry (i.e. free enrollment) where retail customers freely enroll as reps simply to get the products cheaper.
        Several states have already adopted statutes based on this model, including Idaho, Texas, Louisiana, Kentucky, South Dakota and Oklahoma. The bill has already passed by a vote of 64-3 in the House and 34-0 in the Senate.
        FitzPatrick is further emboldened by language within the FTC’s suits against such companies as Equinox and Five Star Auto Club. In these, and other cases, the FTC does clearly state that commissions may only be paid on sales of products to those who are not “participants or recruits in the multilevel marketing program.” In other words, these federally prosecuted companies were, in fact, held to the standard of only paying commissions on sales made to retail customers. If the FTC were to hold every MLM company to the same standard, we’d be in trouble. The only chink in FitzPatrick’s seemingly iron-glad case is – the FTC doesn’t.
 vIn an effort to get a definitive and final answer to this murky and ominous question, the DSA did something rather ingenious – they asked the FTC. The FTC responded in a letter signed by the Acting Director of Marketing Practices (www.marketwaveinc.com/FTC_Letter.pdf) as follows:

        “The Federal Trade Commission often enters into consent orders with individuals and companies that the Commission has determined have violated the FTC Act. To protect the public from those who have demonstrated an unwillingness to follow the law, these orders often contain provisions that place EXTRA constraints upon wrongdoers that DO NOT APPLY TO THE GENERAL PUBLIC. These “fencing in” provisions only apply to the defendant signing the order and anyone with whom the defendant is acting in concert. THEY DO NOT REPRESENT THE GENERAL STATE OF THE LAW… For example, when the Commission brings a pyramid scheme action, the case often concludes with a consent order.  The scope and severity of the order will depend upon the facts of the case; however, most such orders contain definitions that exclude any sale to a participant in the business from the calculation of the venture’s legitimacy.  These definitions draw very clear lines for those who have demonstrated a willingness to violate the law, BUT ARE NOT INTENDED TO REPRESENT THE STATE OF THE LAW FOR THE GENERAL PUBLIC.” (Emphasis is mine).

        In their response letter, they also go on to explain that, indeed, they pay more attention to the motive for distributors buying the product, not the number or percentage of distributors buying the product. Case closed.
        Other benighted comments by FitzPatrick in his book include “The FTC has been shown to have inadequate resources to prosecute the MLM pyramid cases. It is financially forced to settle out of court.” The federal government can’t afford to prosecute MLM companies? The same federal government that spends $500 for hammers and $300,000 to study the mating habits of Amazonian tree frogs? Now I’m even more insulted that he thinks we’re all that ignorant.
        One of my favorite FitzPatrick leaps-of-logic is his statement “NuSkin only counted the ‘active’ group when reporting average incomes… leaving out the larger group who never earns anything.” Perhaps they never earned anything because they were… inactive? It follows the same illogic as “The vast majority of the losers in MLM drop out within a year.” But then, this is very likely the reason they lost money – they quit within a year. In fact, most voluntarily quit within weeks. That’s a problem with the commitment level of most distributors, not the MLM model.
        He also states that “In 1998 NuSkin paid out 2/3rds of its entire commission to just 200 upliners out of more than 63,000 currently active distributors. The money that this .3% received came directly from the unprofitable investments of the 99.7% of the others.” Nu Skin paid out over $330 million in commissions in 1998. This produced at least 200 millionaires, according to Fitzpatrick (that’s a bad thing?). And the remaining $110 million went to the other 62,800 reps, who would have then averaged over $1,750 in earnings that year. Yet, he matter-of-factly claims every one of these 62,800 were “unprofitable.”
        FitzPatrick has written another popular internet hit piece titled “The 10 Big Lies of Multi-Level Marketing.” He kicks this diatribe off by calling MLM a “free market hoax… analogous to calling the purchase of a lottery ticket a ‘business venture.'” Of all the specific accusations made by anti-MLM zealots none offends or insults me more than this one. I’ve put in years of hard work, at great expense and sacrifice, to get to the level of success that I’ve reached in MLM. Now I’m being told by Robert FitzPatrick that I was just lucky.
        FitzPatrick again reveals his lack of understanding of even the most basic MLM concepts with observations like, “If a 1,000-person downline is needed to earn a substantial income… those 1,000 will need one million more to duplicate the success.” True, if you assume all 1,000 of those under you are on your first level – a wholly absurd assumption. However, if you had 1,000 people under you, wouldn’t the nine people directly upline from you also have at least 1,000 under them? So, right there we have ten people with 1,000 people under them and it only required 10% of the people FitzPatrick is claiming it would. To be fair, I understand and appreciate the point he’s trying to make – yes, the progression obviously can’t go on forever – but let’s not mislead the reader with garbage math. His statement is simply, logically, mathematically untrue.
        I won’t attempt to defend against each and every one of FitzPatrick’s alleged “big lies” since they all fall into one of three categories. Either they are simply not a lie, such as #7, “You can do MLM in your spare time.” In fact, most successful MLMers worked part time in the beginning. Your time investment does take on a bell shaped curve, requiring more than spare time effort eventually, but only as your downline, and income, grows accordingly. Or, the “lie” is overstated, such as #6, “Success in MLM is easy.” Sure, many over-zealous, naive or dishonest MLM participants make such claims. But most don’t. The majority understand the obvious folly in using such an approach – if you deceive your prospect into joining this way, they are quickly and inevitably going to discover the truth on their own and quit, making the whole process pointless. Or, the “lie” is entirely fictitious, such as #3, “Eventually ALL products will be sold by MLM” (emphasis mine). Even the mythical “50-60% of all goods will be moved by MLM… according to the Wall Street Journal” claim is accepted as ridiculous today by most MLMers with even a modicum of experience. I have heard some of the most outrageously over hyped MLM presentations of all time, and never, not one single time, have I heard anyone even insinuate that, someday, “all” products will be sold via MLM.
        So, to wrap up, Robert FitzPatrick acknowledges in his works that MLM is “backed by an ex-president” and “defended by top law firms.” He claims MLM even has its own caucus in Congress. Inc. Magazine, Forbes, Entrepreneur, and Success Magazine have all published positive articles about this industry. MLM is recognized as a legal business model by all fifty state’s Attorneys General, the FTC, the vast majority of the House and Senate, and many state and federal courts, and has been for decades – not to mention the SEC and the several hundred thousand investors in MLM company stock. Yet, FitzPatrick believes he’s right, and all of them are wrong. He also claims the “great majority” of the three largest U.S. based MLM company’s sales are outside the U.S. – so we’re fooling the citizens, courts, and regulators in over 60 other country too!
        Or, maybe the ex-president, top law firms, business media, our state and federal government – and the several million of you who participate in this industry – are the one’s who get it, and Robert FitzPatrick is wrong.

        Next issue we begin a series on Ruth Carter, author of “Behind The Smoke & Mirrors” and co-founder of MLMSurvivors.com.
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Anti-MLM Zealots – Part III

December 27, 2012 Leave a Comment

Robert FitzPatrick
By Len Clements © 2005

       If you are one of the many thousands of honest, rationally thinking folks who supplement their income, or make their living, from a good network marketing opportunity, you should get the back issues containing parts one and two of this series. If network marketing matters to you, you are not going to want to miss a single word. There are four individuals out there who are doing more than just trying to dissuade your prospects from considering your MLM opportunity, they are trying to get your state and federal government to take away your choice to pursue an MLM career. If you are making an honest living at MLM, as I am, they want to take that away as well. Fortunately, they’re attempts have so far been utterly ignored by regulators. However, your prospects are listening.
      I’ll be telling you why they’re wrong here in the MLM Insider over the next several issues. The subject of Part One was Dean Van Druff, the author of the well traveled article “What’s Wrong With Multilevel Marketing” (get Part 1 to find out “What’s Wrong with Van Druff’s article!”). Last issue I started in on Robert FitzPatrick, author of the book “False Profits.” FitzPatrick has got it wrong on so many levels (pun intended) that it’ll take three segments to cover even the highlights.

Pyramid Nation – Robert FitzPatrick

      FitzPatrick’s newest work (2002) is a 62 page booklet titled “Pyramid Nation: The Growth, Acceptance and Legalization of Pyramid Schemes in America.” Oddly, the cover art depicts Pieter Brueghel’s (1525-69) rendering of the Tower of Babel, which bares only a vague resemblance to a pyramid.
Let’s begin by dissecting the title itself.
      “Pyramid Nation.” The title and cover art is misleading, at least geometrically. MLM downlines are, in fact, diamond shaped. Ironically, network marketing is the only form of business that does not form a pyramidal company hierarchy.
      “Growth.” Really? Is FitzPatrick admitting that after 68 years of existence, this supposedly saturated industry is, indeed, still growing? This, of course, totally contradicts the very backbone of practically every Anti-MLM Zealot’s primary argument. It is also quite true!
      “Acceptance.” Yes, MLM is gaining more and more acceptance over time. FitzPatrick is right again. In so many words, he then tries to explain this away by suggesting we’re just all getting better at brainwashing people, we’re getting lazier in our investigation of the opportunities we pursue, more ignorant of what defines illegal schemes, and more lax and less attentive in our regulatory duties. The whole time ignoring the easiest and most obvious reason. MLM is acceptable.
      “Legalization.” The word implies MLM is in the process of being legalized. Yet, MLM has been formally recognized as a legal form of business and compensation model in all 50 states for over 25 years. MLM simply can’t get any more legal!
      FitzPatrick first takes on the FTC for it’s “failure to oversee multilevel marketing companies.” But only a single page flip away he states that “between 1996 and 2000, the Federal Trade Commission has prosecuted more pyramid schemes than in the previous seventeen years.” Keep in mind that to FitzPatrick “multilevel marketing companies” and “pyramid schemes” are synonymous. He backs up his point by dropping names such as Equinox, Jewelway and Five Star Auto Club, among others. He suggests that the only reason the FTC hasn’t prosecuted the other 2,100 MLM companies is not because the others have done nothing wrong (the most logical and obvious reason), but because the FTC has become complacent and inattentive and simply hasn’t got around to them yet.
      FitzPatrick later states that our “return on investment” (he means the income from our business) comes directly from purchases and “fees” paid by new sales reps, but not from product sales to “end-users.” First, to pay bonuses from distributors “fees” is illegal, and has been the catalyst to many state and federal prosecutions. That’s why virtually all MLM companies don’t do that (although pyramid schemes disguised as MLM companies do, but FitzPatrick chooses to ignore any such dichotomy). He also fails to accept the reasonable – and legal – position that distributors can be “end-users.” Indeed, several states have statutes that specifically recognize personal consumption by distributors as legally commissionable, and the FTC has clearly stated that they hold the same position (more on this in the next installment). It is, and with rare exception has always been, the position of regulators that who is buying the products is not as important as why they are buying them. If an MLM company is selling most of their products to distributors who actually want them, and would have purchased them anyway (even without an income opportunity attached), no problem. If they are buying the product as a token purchase just to meet a quota in the compensation plan, and that’s the only reason they’re buying the products, big problem. That’s exactly what got Equinox and Jewelway shut down.
      Most of FitzPatrick’s case is at least based on something. He’s a smart and articulate guy who has a masterful way of making a puff of smoke into a mushroom cloud. But occasionally he comes out of left field with astonishingly ignorant comments such as “MLM… attracts millions of people to this high risk and unprotected status of… independent distributor.” Wow. How could he not be aware that MLM ventures involve a fraction of the start up costs of conventional businesses? Perhaps four or five digits less! Or that an MLM distributorship is the only type of business where a failed businessperson can return their inventory and sales material for a 90% refund (try getting your franchise fee back from McDonalds, or returning all the appliances and fixtures from your failed restaurant). Or that MLM companies provide many services to distributors that conventional business owners would pay thousands of dollars a month for, such as collecting and paying sales taxes, product R&D, warehousing, customer administration, and much more – for around $25 per year. MLM is one of the lowest risk business ventures a person could possibly pursue!
      Next FitzPatrick describes the daunting qualifications employed by most MLM programs to reach the highest paying rank in the compensation plan. “Only a small number can ever achieve the volume or required positions in their downline, and hence only they will ever qualify for the high commissions on each level.” Here’s a great example of FitzPatrick’s subtle wordsmithing. Notice he says “high,” not “highest.” The difference is, one’s wrong, one’s right. By anyone’s definition, “high” payouts can be achieved well before the very top rank is achieved. He’s talking about how challenging the qualifications are to reach the highest pay stage, yet implies such quotas must be met to achieve “high” commissions. Furthermore, achieving the toughest to meet quotas to achieve the most rewarding stage in the commission structure is standard and acceptable procedure in every type of sales profession. Those that achieve the greatest success should be the most greatly rewarded. What rational person could challenge that? Yet, FitzPatrick oddly presents this as an inherent evil of MLM.
      To be fair, he made the above point within the context of how, contrary to conventional sales programs, many MLM plans reward those furthest away from the actual sale than those in the levels directly above the sale. Many (not most) plans do this. He’s right. He then goes on to say this “defines the company as a pyramid recruiting scheme, not a sales company.” He’s wrong. This definition is entirely the invention of FitzPatrick’s cohort Jon Taylor (we’ll get to him later). No local, state or federal regulatory agency has ever even attempted to apply this aspect of a compensation plan to their anti-MLM prosecutions.
      As I’ve mentioned in previous installments, how an Anti-MLM Zealot defines basic MLM facts and figures tells us a lot about their actual knowledge of the subject. According to FitzPatrick, “Avon… does not use the MLM business model.” Yes, they sure do. He also believes “The MLM business model was developed by the Amway Corporation in the late 1960’s.” Not even close. Wachters was employing a multilevel compensation system as early as 1936, and was popularized by Nutrilite in 1945. Even Shaklee and Neolife launched before Amway did – which was in 1958! Also, as any MLMer with even a moderate understanding of the field would know, downlines are, once again, not pyramid shaped. Yet FitzPatrick states that the “deepest level (will) always consist of 50% of the entire organization” (emphasis mine). This is never even remotely true in actual practice since the organization is more diamond shaped, and due to the limited number of first level positions under most people it tends to form a tall, skinny diamond. Therefore even the widest lever (usually somewhere in the middle levels of your downline) often times doesn’t hold 50% of your downline. What’s more, FitzPatrick’s statement assumes a perfect geometric progression (2 by 2 in this case) which is an absurd assumption. Ironically, our use of such geometric progressions are the target of most Anti-MLM Zealots who also claim it is absurd and will never actually happen. So if this wholly theoretical event will never even come remotely close to occurring in the real world, why offer it as evidence?
      Once gain, as in his previous book, FitzPatrick spends much time making his case for the “ultimate collapse” of every MLM organization, and “guaranteed” losses to every distributor. But a network marketing company’s sales organization is nothing more than a large downline, yes? There are dozens of MLM companies over ten years old. Herbalife is 23 years old. Mary Kay Cosmetics is 41. Amway is 46. Shaklee will celebrate its fiftieth anniversary in 2006. When is this “ultimate collapse” going to occur, I wonder? Indeed, FitzPatrick later states that “companies using the MLM system… can endure for decades.” He actually states that this collapse occurs annually! Which begs the question, if the company’s downline continues to endure, why couldn’t this same enduring scenario be applied to your downline? And if this perpetual cycling of drop outs and replacements should be considered “cumulatively” as he suggests, then why, after over half-a-century, have we not in fact saturated the entire U.S. market? (not a rhetorical question, and one I’ll specifically address in a later installment). And if my losses were “guaranteed” I now feel prouder than ever that I overcame those kinds of odds. I bet a lot of you feel pretty good about defying those “guaranteed” losses.
      Anti-MLM Zealots love to focus on a few of the baddest bad-boys throughout MLM history in an effort to create the illusion the other 2,100 companies operate the same way (with only their “pyramid” shaped brush to connect them). So naturally, FitzPatrick spends a lot of time on Equinox. Here are two of his more astonishing statements:
      “The (Equinox) settlement resulted in shutting down the company, the payment in restitution of about $40 million to victims, and the banning of the company founder from the MLM business forever.”
      “(this case) confirms that pyramid sales schemes are so firmly entrenched that it is now largely beyond the power of the government regulators to control them.”
There is only one sentence separating these two diametrically opposing statements.
      His depiction of the Equinox settlement is accurate. And remember, the FTC is “failing” to oversee the MLM industry, and us distributors are “unprotected.” Then the very next page he claims the “key factor” that lead to the decision to settle rather than getting a court ruling was “the prohibitively high cost of prosecution.” Hmm. I wonder if the fact the founder agreed to a lifetime ban from MLM, to shut down the company, and to pay $40 million in restitution to his “unprotected” distributors, as opposed to tying it up in court for years and eventually paying most of it to lawyers, might have been the “key factor.” He then goes on to claim Equinox was “manipulating the media” then provides only one example, the #1 position on Inc. Magazine’s 1996 list of fastest growing privately held companies (an audited, financial fact), which was immediately proceeded by a paragraph about how Equinox was “raked over the coals” by ABC’s 20/20.
      Sometimes it almost seems as if several people ghost wrote FitzPatrick’s book and never compared notes.
      FitzPatrick states that “the vast majority of (Equinox) sales reps” suffered “enormous losses.” Yet, in the same sentence sites their $195 million is sales in 1995. Equinox’s pay plan averaged about a 35% pay out. That would mean Equinox paid out over $68 million to their sales reps in 1995! He later sites the recent sales of Amway, Nu Skin and Herbalife which total almost $6 billion worldwide. Meaning they paid out well over two billion dollars to their distributors – a part of the equation FitzPatrick always seems to forget to calculate.
      Since the FTC settled with Equinox and never received a “definitive court ruling,” FitzPatrick claims the “Equinox model remains shielded.” He then informs us that, indeed, its top distributors have already cloned a new company under a new name. He’s right. And that company was also shut down by the FTC last year.
      Anti-MLM Zealots routinely site how we torture our positive industry data, but have no qualms about making love to their own negative statistics. FitzPatrick is no exception. He states that the U.S. MLM industry moves between $5-10 billion in wholesale product annually, and that less than “one-half of one percent” (.005) ever earns a net profit. Upon reading this I was struck by how he was only able to quantify our annual sales to within $5 billion dollars but somehow managed to calculate our industry’s success rate to three decimal places. And since the average compensation plan pays out about 45% of wholesale that would then mean, based in FitzPatrick’s figures, this industry also paid back $2.25 billion to $4.5 billion annually in commissions! Furthermore, on the very same page FitzPatrick states that “The MLM business model is not taught or researched at any major business school in the country” and that “No empirical data on its operations are compiled by the government…” then goes on to say “The industry is freely allowed to make outrageously misleading claims” to enroll new distributors. So, if we don’t have any actual research to back up our claims, where does FitzPatrick get his, I wonder? And if we are “freely allowed” to make misleading claims, then why was Equinox (and others) cited for “deceptive trade practices”? Such “outrageously misleading claims” have been the crux of many regulatory actions. What’s more – we do have the research to back up much of our industry data! There’s extensive research done by the DSA, DMA, and MLMIA, as well as this publication. My own company MarketWave has been tracking industry data for 14 years.

      We’re only half way through FitzPatrick’s “Pyramid Nation” and there’s still his essay “The 10 Big Lies of Multi-Level Marketing” to cover. I’ll wrap up my rebuttal to his works, at least until he cranks out another book, in the next segment. Wait until you hear his depiction of what the FTC thinks about our earning income from our downline’s personally consumed product – and what the FTC actually said! I’ll be putting this oft-debated issue to bed once and for all. Then the real fun begins as we take on Ruth Carter and her cohorts over at MLMSurvivor.com. I planned on this being a one segment piece, but they’ve provided me with so much great material we may not be finished with them until 2006! And there’ll be so much more after that.
Stay tuned!
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Anti-MLM Zealots – Part II

December 27, 2012 Leave a Comment

Robert FitzPatrick
By Len Clements ©2005

       In case you missed part one of this series – get the back issue! If you are one of the many thousands of honest, rationally thinking folks who supplement their income, or make their living, from a good network marketing opportunity, you are not going to want to miss a single word of this multi-part series. You see, there are four individuals who believe, and are trying desperately to get you and everyone else you know to believe, that MLM is an illegal, unethical scam, and you are one of its ignorant, gullible “victims.”
       These Four Horsemen of the Apocryphal are small in number, but thanks to the internet their words are available to millions, and they are doing some damage. Whether you realize it or not, many of those who are not responding to your marketing campaign are victims of the anti-MLM propagandists. Having heard only their side of the story, and with no ability for us to rebut their otherwise easily rebuttable rants, our prospects become their victims.
       I’ve made a good, honest living at this business for 14 years now. I sleep in as late as I want in the morning, take a day (or week) off when ever I feel like it, paid off the mortgage of a four bedroom home in less than three years, and even better, I was afforded the ability to buy a nice home near me for my elderly mother after my dad passed away last year. I certainly don’t feel like a victim. And I’ve never front loaded anyone with unwanted products, never made ridiculous medical or income claims, never mislead anyone into attending an opportunity meeting, and never sold any training or tools for a profit. And I never lost a single friend in the process. Yet, there are surely tens-of-thousands of people who have shunned the opportunity to experience all that network marketing has given me, and so many others, because of the anti-MLM propaganda machine. Yes, there are people who have been victimized by a few bad MLM companies, or more likely bad pyramid schemes disguised as MLM companies. But as many, if not more, are “victims” of those that would have you believe there is no good in network marketing.
       I’ll be telling you why they’re wrong here in this publication over the next several issues. The subject of Part One was Dean Van Druff, the author of the well traveled article “What’s Wrong With Multilevel Marketing” (my article could have been titled “What’s Wrong with Van Druff’s article!”). I think it’s about time these naysayers be taken to task. Their words have lingered unopposed long enough.

False Profits – Robert FitzPatrick

       Another prominent MLM opponent, Robert FitzPatrick, has gone so far as to co-author two books on the subject. His primary work is a 216 pager called False Profits, and subtitled “Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Scheme.” I think Mr. FitzPatrick mistitled his book. It should have been called “An Expose’ of the Airplane Game.” Indeed the first half of the book is nothing more than an elegant rant about the classic pyramid scheme of the 70’s and 80’s. Even when MLM is discussed it is usually within the context of our alleged “capitalization on New Age, Mysticism and Transcendentalism.” Dr. FitzPatrick often blurs the lines between present day network marketing and the New Age influence of 80’s style pyramid schemes, which in my over 14 years of full time study and participation, I have never seen practiced by anyone (although New Age philosophy did permeate a small number of legal MLM organizations in the 70’s and 80’s). FitzPatrick, himself an avid student of “New Thought philosophy” and a graduate of several personal development and enlightenment courses, focuses heavily on “New Age philosophy” in False Profits, which he claims plays a “central and defining roll” in enrolling and inspiring distributors. He claims that all MLMs rely on the “core beliefs” of the New Age community. That being, “wealth comes not from frugality, hard work or ingenuity, but from being in the right place at the right time. And faith will take you to this mystic and magical place.” So, what if we (like I, and so many of my peers) apply frugality, hard work and ingenuity to their MLM business? If FitzPatrick was only denouncing the way many of us promote and conduct our MLM business I’d have to agree with him, to an extent. I don’t like the way some people pitch and practice MLM either. But why throw away the present just because you didn’t like the wrapping paper?
       FitzPatrick accuses MLM of wrecking the American Dream of millions of would be entrepreneurs. “It (MLM) leaves in it’s wake a trail of cynicism and disempowerment, no small wonder as recruits observe billions of dollars landing in the laps of tiny elite groups at the top.” Where, I wonder, does FitzPatrick get this stuff? Most MLM recruits are in and out of the business so fast that their experience could have little impact on their psyche, and the majority of those I’ve known who’ve spent some time working their MLM business, gave it their all, and failed, simply moved on to other entrepreneurial ventures. And what about all those thousands of people like me who are making only supplemental or good living incomes and fall somewhere in the middle of their company’s hierarchy? Throughout virtually all of FitzPatrick’s work it’s as if this substantially larger demographic didn’t even exist.
       It’s interesting to note that only a page later in his book, FitzPatrick states “… no one makes a substantial income in the MLM system.” So now, not only do all those like me not exist, but neither do those elite few at the top. I’m really not trying to exploit poor semantics here. “No one” means NO one, doesn’t it? So which is it?
       FitzPatrick, an obviously scholarly and intelligent man, demonstrates his ignorance of MLM with statements such as; There are 5-10 million distributors in the U.S. selling $10-$20 billion in goods, “mostly to each other.” It seems odd that such an “expert” could not narrow down such basic data to within at least a 25% margin of error. In a later section of his book FitzPatrick does acknowledge that his numbers work out to an average $2,000 per year in sales per distributor, but then notes that this would leave a “profit” of only about $50 per month, then curiously drops the point as if to imply that would be the total income. However, FitzPatrick completely fails to consider that most compensation plans pay about 8% of downline volume to each distributor in commission. How does one write a book about multilevel marketing and when challenging its income potential ignore multilevel overrides?
       And are we selling all this product “to each other?” No, we sure aren’t. Virtually all contemporary MLM companies today have no requirement or system in place where higher ranking reps supply those below them with product. That’s how many old-school MLM companies used to do it before affordable and practical computers. No MLM company still does that. Not one. Even in 1997 when FitzPatrick wrote his book, his comment would have been obsolete by a couple of decades. Curiously, FitzPatrick makes several references to distributors warehousing and passing on products to other distributors, yet later acknowledges that “most MLM companies distribute via computer thus freeing distributors from having to personally stock and deliver inventory.” In seems as if FitzPatrick occasionally forgets his own earlier arguments only to contradict them later.
       In the same paragraph he goes on to say “The larger of these operations have already reached their saturation points in the United States… who has not been solicited? Who has not tried it?” Earlier, FitzPatrick asserts that his analysis of MLM will be based on, among other things, “logic.” Let’s do the same. If everyone has been solicited, or even tried MLM already, then how did so many companies that have launched in the last few years, such as Freelife, Usana, New Vision, Tahitian Noni, Xango, Isagenix and so many others, acquire tens of thousands of new reps? Is FitzPatrick suggesting these are all ex-distributors from other companies?
       FitzPatrick goes on to say that MLM “catapulted into economic expansion in the late 1980’s” due to the New Age movement. In fact, MLM exploded in the very early 80’s primarily due to a very favorable court ruling in the FTC vs. Amway case in 1979 (which essentially validated the legality of MLM) and economic conditions very favorable to MLM – such as the highest unemployment rate since the Great Depression.
       His lack of knowledge of the subject matter is never more evident than when he states “One of America’s fastest growing MLMs, Nutrition For Life, which was founded by marketer Kevin Trudeau sells the inspirational cassette tapes of the largest publisher of New Age catechism materials, Nightingale-Conant, as one of its core products.” First, NFLI was not founded by Trudeau (NFLI launched under the name Consumer Express in 1984 and Trudeau was hired as a marketing director in 1987). Second, the majority of the Nightingale-Conant catalog could hardly be considered “New Age catechism material,” and thirdly, the Nightingale-Conant material was only a fringe part of the more than 300 consumable products offered by NFLI and for only about two of their 19 years of business. What’s more, this “fastest growing MLM” filed bankruptcy and went out of business six years after False Profits was first published.
       Or, how about this statement: “…what ever the (MLM) product happens to be, it is presented as largely incidental.” I wonder how distributors for such companies as 4Life, Matol, Cell Tech, Tahitian Noni, Legacy, or Xango would feel about that assertion considering their entire companies are based on one primary product. There are numerous MLM companies today whose distributors are fanatical about their products (in many cases to a fault) and who recognize that income is based on a percentage of sales volume. It’s common knowledge today (not to mention common sense) that massive product sales volume is the key factor in generating significant income.
       Exaggeration, hyperbole and semantic manipulation are all signs of a weak argument, and FitzPatrick resorts to such tactics on a number of occasions. For example, he sites that there are “countless” examples of MLM creeping into “the most sacred of places” – religion. Then he accounts for only three. One was a blatant pyramid scheme (not an MLM operation) back in 1988 called Corporate Ladder, and another was Pat Robertson’s short lived KaloVita company and his “prosperity theology.” FitzPatrick is so desperate to come up with a third example that he throws in Robert Schuller only because his Positive Thinking tape set was once sold as part of an MLM company’s product line.
       Another example can be found in his discussion of Richard Poe’s book Wave 3 where Poe offers many examples of MLMers making one-half million dollar per year incomes. First he notes that Poe does concede that “only the rarest few in the industry achieve this level of success,” then refers to this as an “admission of often paltry financial returns from MLM.” How does acknowledging that very few make half-a-million per year get twisted into “often paltry returns?” What about all those incomes (and thousands who earn them) that fall between half-a-million and paltry? Oh, I keep forgetting. We don’t exist.
       In his effort to portray pyramid schemes and MLM as “Kissing Cousins,” FitzPatrick comments: “Periodically, appearing under new names then running their brief and inevitable course, these schemes now emerge bearing the more respectable, legal veneer of multilevel marketing while leading ever increasing numbers of people down the same dead end.” But there are dozens of MLM companies over ten years old. Herbalife is 23 years old.  Mary Kay Cosmetics is 41. Amway is 46. Shaklee will celebrate its fiftieth anniversary in 2006. Brief and inevitable dead end? Really?
       In total, only eight MLM companies are even mentioned by name in False Profits and only four are discussed in any detail. Even then we only hear anecdotal evidence based on the experiences of a handful of failed distributors (once again, there are currently over 2,000 MLM companies in operation in the U.S., and over 10 million distributorships). FitzPatrick acknowledges that the Airplane Game is the “center piece” of his book and devotes a substantial portion of it to a detailed personal journal of his experience with it. Of those MLM companies mentioned, the vast majority of his attention is on Amway. He is highly critical, and relates numerous examples, of tactics that were virtually exclusive to Amway (aka Quixtar, aka Alticor), then couches his comments in language that suggests such tactics are universally practiced throughout the entire MLM industry. What attention is devoted to other MLMs is mostly made up of a rehashing of Nu Skin’s troubles back in 1991 and ‘92 with little mention of the extensive and model reforms they have made since then.
       But then, this is a common foible in every Anti-MLM Zealot’s argument. That being, the actions of a few high profile regulatory or media targets is indicative of how the other 99% of MLM companies operate.
It’s not.
       Robert FitzPatrick’s writings provide so much fodder for this series that I can’t cover it all in one issue. His essay titled “The 10 Big Lies of Multi-Level Marketing” and newest booklet “Pyramid Nation” reveals far more and better examples of Dr. FitzPatrick’s utter lack of understanding as to the true nature of network marketing today.
       And if you’re wondering about such issues as “inevitable saturation” or “99% of all MLM participants fail” or any of the other tired, almost cliché’ Anti-MLM Zealot mantras – oh, we’re getting to them.
       The renovations begin later. This is just house cleaning.
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Anti-MLM Zealots – Part I

December 27, 2012 Leave a Comment

Dean VanDruff
By Len Clements ©2005

       I love Multilevel Marketing. I’ve been involved, full time, for over 14 years, and I’ve managed to make a very good living at it – and I’ve never front loaded anyone with product, I’ve never flashed my check, I’ve never mislead anyone into attending an opportunity meeting, I’ve never sold training or tools for a profit, I’ve never made an outrageous product claim, and I’ve never lost a single friend in the process. I have, with hard work, commitment, and patience managed to ethically and honestly build a downline sales organization that has afforded me enough residual income to “exit the rat race.” However, according to some, I don’t exist.
       There are certainly some networkers among us who might be considered “zealous” as well. Perhaps overly so. But for every person attempting to convince a jaded, wary world that MLM is true, and good, there are at least an equal number who immediately dismiss it with prejudice. And, yes, some of them can get a little overzealous as well.
       Anti-MLM Zealots tend to come in two flavors: Ignorant or vindictive. In other words, they’ve either never actually participated in MLM themselves (thus have adopted someone else’s opinion as their own, or simply guessed at their conclusions), or they have participated and failed at it. Would you take marriage advice from a guy who was recently divorced? Or, worse, has never even had a girlfriend? Would you take golf lessons from someone who shot in the 120s, or who never played golf – no matter how much they claimed they had “studied and analyzed” the game?
       In fact, there are four individuals who have made it a point (and in some cases, it seems, their life’s mission) to be a thorn in the side of every MLMer in an effort to save the other 283 million Americans from a fate such as mine. Although these Four Horsemen of the Apocryphal are small in number, thanks to the internet their words are available to millions, and they are doing some damage (do a Google search for “MLM” — the top three results are anti-MLM sites). Whether you realize it or not, many of those who are not responding to your marketing campaign are victims of the anti-MLM propagandists. To many they seem to make sense.
       Do they? I certainly don’t think so, and I’ll be telling you why here in this publication over the next several issues. I think it’s about time these naysayers be taken to task. Their words have lingered unopposed long enough. They’re wrong, and here’s why…

What’s Wrong With Multilevel Marketing? – Dean Van Druff

       Dean Van Druff, the author of the well traveled, rambling, disjointed essay “What’s Wrong With Multilevel Marketing?”, is perhaps the most prevalent of the four in spite of making the weakest argument. Mr. Van Druff goes so far as to state that “MLM will never work, even in theory” in the face of the blatant fact that MLM is a 64 year old industry with numerous profitable companies and thousands of successful distributors.
       The ignorance of most Anti-MLM Zealots is clearly evident in their reporting of basic MLM related facts and figures, and Van Druff provides a litany of them. I should point out that I am not at all implying he, nor anyone opposed to MLM, is dumb. Ignorant means to ignore readily available information, thus resulting in a lack of knowledge, not intelligence. For example, throughout Van Druff’s 12 page essay he makes several observations about MLM that are simply inaccurate, such as, that we are a 25 year old industry, which would have been off by 30 years even in 1990 when his essay was originally written. This could be explained by Van Druff’s own reluctant but eventual admission that he has had no personal experience with MLM and did little, if any, research into the subject previous to putting his “theoretical analysis” on paper.
       Besides the historical inaccuracies mentioned previously, Van Druff also claims “many high level MLM promoters have been shut down, the ‘executives’ incarcerated.” He later claims that the founder of FundAmerica (which he misspells) was “arrested for having generated some 90% of revenues selling ‘distributorships’ versus product.” Although FundAmerica was declared a pyramid scheme, the founder was actually arrested on fraud charges. In fact, it is extremely rare for anyone promoting even a blatant pyramid scheme to actually serve jail time, and most legal actions against MLM companies are civil, not criminal. The few criminal cases involving incarceration (three that I know of over the last 25 years) did not involve multilevel marketing companies. They were, in fact, blatant pyramid schemes.
       Van Druff again shows his ignorance by asking the question “If (an MLM product) is so great, then why isn’t it being sold through the customary marketing system that has served human society for thousands ofyears?” Yes, he actually said that in his article, and its wrong on multiple levels. First, I can think of only one “marketing system” that has served human society for “thousands of years” – word of mouth. The marketing system used by MLM companies. Let’s forgive his hyperbole and assume he meant store shelves. Has Mr. Van Druff ever researched what is involved with getting a product on a store shelf? Obviously not, for its a daunting, expensive, extremely competitive challenge. It also involves millions of dollars in advertising to get those products off the shelf. Where as word-of-mouth is not only the most powerful form of marketing, it’s the least expensive (that’s a pretty good combination). But then, this is one of the most fundamental, basic, and most touted benefits in regard to marketing a product via MLM. Yet, Van Druff appears oblivious to it. This is the epitome of ignore-ance.
It gets worse.
       Van Druff also claims that some MLM companies attempt to address the saturation issue “by limiting the number of people you can sponsor, say, to four.” Really? Actually, no. No such limitation has ever existed in any of the several hundred MLM programs I’ve reviewed over the last 20 years, nor do I suspect it has ever existed. He’s probably talking about matrix plans where you are limited to the number of people you can place on your first level, but not the total recruited, and he just doesn’t understand what he’s talking about. He also claims MLM distributors “usually sell through prefab parties or home demos.” Of course, anyone with any actual experience in MLM would know that such activity is uncommon today in all but a few old-school MLM programs (although it is making a comeback).
       He goes on to describe a “shadow pyramid” where people are induced into buying “motivational tapes, seminars, and videos”. Of course, we all know he’s talking about only one, albeit very large, MLM company. And even then its upline distributors (not the company) who are making the profit, and on a direct sales basis, not MLM, and such purchases are clearly stated by the company as being totally voluntary.
       He also claims the MLM company itself profits by “conning” recruits with a “distributor fee.” What he is ignorant of is the easily obtainable and verifiable fact that, by law, MLM companies must sell their sales aids, promotional tools, training, and distributor kits/fees at cost! No significant profit can be made from these items, and they can not be commissioned as part of the MLM compensation plan. Sure, some MLM companies push the envelope a little on this, and yes, some push it a lot. But the vast majority do not. Furthermore, that $25-$50 annual distributor fee we all are “conned” out of typically covers such things as maintaining our sales organization, the paying of commissions to our downline sales reps, the paying of sales taxes to all 50 states, data entry services, customer support, warehousing, and various other administrative functions that would likely cost hundreds, if not thousands of dollars per month if we were to hire someone to do them for us.
       Van Druff then takes on “loony product claims.” While I concur with his overall criticism (some are pretty loony), his theory as to how MLMers “effectively skirt the Federal Trade Commission” is by using “word of mouth testimonials, supposed ‘studies’ done by scientists, fabricated endorsements (etc)…”. If Van Druff would have invested even ten minutes of research into this topic, he could have easily discovered that, indeed, the FTC already prohibits curative or treatment claims by all of the means he lists, including personal testimonials. In fact, the FTC has made available (for years) guidelines for product claims in their document “Dietary Supplements: An Advertising Guide for Industry” We are just as forbidden from promoting our products in all the ways Van Druff describes as any other marketer of products.
       Van Druff arrogantly professes that “the law generally condemns MLM” and even goes so far as to claim that all MLMs are illegal! Of course, Mr. Van Druff is utterly and completely wrong. Our state and federal government makes those laws, and our courts decide who breaks them. And, based on decades of legal precedent involving hundreds of cases, our government and our courts have ruled that MLM is legal. Van Druff’s opinion, much to his chagrin I’m sure, doesn’t count. Van Druff then borders on the absurd by implying there is some grand conspiracy by MLM “experts” to “propagandize, lobby and defend” MLM. (Defend ourselves? How dare we?!!!). He theorizes (but states as a matter of fact) that the MLM industry has used “so much money from it’s victims” to hire these nameless lobbyist experts who have managed to pull the wool over the eyes of state and federal regulators. Considering, once again, there are over 1,500 MLM companies in the United States, over 7 million distributors, and MLM has existed for over half-a-century, those must be darn good lobbyists! Of course, the truth is, few MLM companies or distributors are involved in defending the industry on a regulatory level. That job is left to the MLMIA and the Direct Selling Association, which is a national trade organization representing all direct sales companies (MLM or otherwise).
       When I inquired as to whether or not Van Druff has had any experience with MLM, he responded by directing me to a section of his web site (which I had read) where he states his analysis was “theoretical.” He then mockingly attacked my intelligence and investigative skills for not understanding that this meant he had no experience (of course, he could have just said “no”). I guess, in Mr. Van Druff’s world, you can’t have any actual experience with things you theorize about. Van Druff references me in his article as a “lucid reformer within the MLM industry.” Flattery will get him nowhere.
       Near the end of Van Druff’s diatribe, he states “Anyone who has any experience with an MLM has strong feelings, either for or against…” Its even worse when people develop strong feelings about it who have no experience at all.

       Mr. Van Druff was just a warm up. Next issue I’ll be cleaning up the mess made by Dr. Robert FitzPatrick, author of the books “False Profits” and “Pyramid Nation.” He’s also the founder of the “Pyramid Scheme Alert” organization. Naturally, he believes all multilevel marketing companies are illegal pyramids. He’s wrong – on multiple levels. Stay tuned. This is going to be fun!
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The Four Major Major Fears of Starting Your Own Business

December 27, 2012 Leave a Comment

And How Network Marketing Blows Them Out of the Water With the Force of a Twenty Megaton Thermal nuclear Explosion!

By Len Clements © 2009

Way back in the last century (1991, actually) a survey was conducted by my research firm, MarketWave, Inc., of over 6,000 people who were not, nor had ever been, business owners. The question was a simple one: If all obstacles were removed, would you like to own your own business? In other words, if what ever was stopping you from starting a business didn’t exist, would you at least attempt it? Basically, would you prefer to be an entrepreneur, or an employee? Eighty five percent said Yes, they’d prefer to work for themselves. Which means 15% misunderstood the question on the survey. After all, if what ever concerned you enough to not attempt a business venture didn’t exist, then you’d have no fear of doing so. I mean, who wouldn’t want to be in control of their own life? To have the freedom to make their own decisions, work their own hours, and write their own pay check?

Even using the conservative 85% figure, that would mean about 200 million Americans want to start their own business, but have never even attempted it! There must be some pretty compelling reasons, we thought, so we set out to find out what they were. To no one’s surprise, it was never about preferring to work for someone else’s business, but rather the incapacitating fear of starting their own.

And it was the same four fears, every single time.

It takes too much money. They didn’t have tens-of-thousands, or hundreds-of-thousands of dollars to invest in a business (and they didn’t know anyone else who did).

It takes too much time. They didn’t want to work 80 hours a weeks for the first year or two to get their business going.

There’s too much risk. Over 56% of all businesses fail in the first two years, and they’d have to quit their job, so there was no safety net.

They didn’t know how. They’d never taken any business courses. They had no business experience. They don’t know anything about taxes, accounting, marketing, and they myriad other skills a good entrepreneur must possess.

Not all responded with all four objections, although most responded with more than one. Surprisingly, “I don’t know how” was the most common response. A lot of folks said they wished they had taken the plunge earlier in their lives, but they just weren’t the Mavericks they once were. They had a mortgage to pay and a family to feed. They felt is was – too late.

Now comes the fun part.

Would you ever consider going into business for yourself if; the total start up costs were under $500, the total time investment could be as little as 5-15 hours a week, you could continue to work in your present job until the income from your business was sufficient to earn you at least an equal income, so there is little risk, and best of all, there were numerous consultants available to you who are experts at running this business, who would train and advise you personally, for an unlimited number of hours, for the entire life of your business, absolutely free! Not only that, but there is another company that will take care of all your research and development, labeling, inventory, shipping, payroll, various taxes, most legal questions, and so on. And, this company will do this for you every month, for the life of your business, for around, oh, $25.00 a year?

Right now, your probably remembering the old adage “If it sounds too good to be true…” Fine. But, hypothetically, would you consider it if all this were true? “Well, sure…” you’re probably thinking, “…but there’s got to be a catch.”

Not only is there no catch, I didn’t even hype the pitch by one iota. These are exactly the conditions in which thousands of successful network marketing ventures have begun.

Sure, some overly zealous networkers may tell you how rich you’re going to get, how easy it is, and how fast it will happen. Please note, I didn’t say that! Network marketing is a serious business, no less than any other you might consider earning your living at for the rest of your life. The reality is, network marketing is hard work, it takes time, and you’ll probably lose some money in the beginning. The difference is, most of the hardest work is done by someone else, your work is done when you choose to do it, it typically takes a few months to turn a profit (some accomplish this in the first month) rather than a few years, and what amount you might lose at first has one, two, maybe even three fewer digits compared to the start up loses of most conventional businesses. Yet, you can still reap the tax benefits of operating your own business, and you have just as much, if not more income potential as most conventional businesses!

Imagine becoming financially independent in one to three years without having to spend thousands of dollars each month, without having to work long hours seven days a week, without even having to quit your job during the development stage, and without having to get a business degree, or hire someone who has one?

 If you are considering starting your own business, and you’ve got access to, let’s say, $50,000 in start up funds (a very modest assumption), imagine how profitable you could be, and how quickly, if you didn’t have to hire employees, you didn’t have to lease an office and/or store front and/or warehouse, you didn’t have to pay sales or payroll taxes, you didn’t have to spend one penny on R&D, graphics design, or development of promotional material, and you didn’t have to hire an accountant, lawyer, or business consultant. And, imagine how much more money might go into your pocket if you didn’t need business partners to help you finance and run the business. Think about it, and try not to become giddy.

Now for the really fun part.

Imagine buying a McDonald’s franchise for the modest sum of one million dollars. The business fails. You call up McDonald’s corporate and ask for a “Return Authorization Number” so you can get your franchise fee back along with a reimbursement check for your unsold supplies and stock. While imagining this scene, also imagine the sound of sirens wailing in the background. That would either be the paramedics coming to assist the poor corporate officer who you’ve just induced into a fit of hysterics, or an ambulance coming to take you to a really nice, soft room.

In network marketing, not only is this not an absurd scenario, it’s the law! One of the aspects of a legitimate, legal network marketing company is the ability of a failed distributor to get a full refund (usually less a 10% restocking and processing fee) on all product and marketing material that is in resalable condition. So, if pursued conservatively and intelligently, there is a monumental reduction in risk relative to conventional business start ups, yet with a comparable or even greater profit opportunity.

Those of you who are already actively involved in network marketing, be aware that the vast majority of your “outer circle” prospects (those who’ve never been involved in network marketing) do have at least the desire to own their own business, as opposed to working for someone else. You don’t have to talk them into the benefits of something they’re already dreaming about having. But, they also have some very powerful, legitimate fears about starting their own business. You’ve first got to open their mind to the idea that there is still a realistic way to achieve that dream, and then define, or perhaps defend, the concept of network marketing (gratuitous plug: my “Case Closed” cassette tape is designed to accomplish both of these steps for you). Only then should you introduce the benefits of your particular network marketing program. Think of it like this: before you can pour fresh, hot coffee into a thermos, you must first open it, then pour the old, stale coffee out, right? Think of your business-phobic prospect as a sealed thermos full of cold coffee.

Now, if you are considering starting your own business, or you want to but have always been apprehensive, open your own mind to network marketing. Think it’s too good to be true? I challenge you – find the catch! If you’ve never pursued a network marketing venture it must be for one of two reasons: you just didn’t know about it, or you have a prejudice against it. And that’s exactly what it is, a prejudice. You have prejudged this business based on what someone else has told you about it (usually someone who has failed at it, or who has also never been involved themselves). In other words, you’ve chosen to adopt someone else’s opinion of this business. Don’t let other people do your thinking for you. Make your own decision based on your own evaluation.

Check this business out. Really do your due-diligence. And when you are done, I would defy anyone, even the most devout skeptic, to not experience a significant paradigm shift.

I dare you to look and not be intrigued!

 

 

 

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Ponzi & Pyramid: Brothers in the Scheme Family

May 11, 2009 1 Comment

And Why Network Marketing is No Relation

By Len Clements © 2012

Had Charles Ponzi and Bernie Madoff switched birthdates, Ponzi would likely have been sentenced to luxury apartment arrest for perpetrating a “Madoff Scheme”. Indeed, Ponzi bilked investors out of a mere $15 million back in the 1920s (about $154 million in today’s dollars), and even managed to pay a good chunk of it back. Madoff madeoff with about $50 billion – that’s with a B – in literally today’s dollars! This makes Mr. Madoff Guinness eligible for the world record as largest Ponzi Scheme in history – well, until around 2016. That’s when something called Social Security will officially meet the definition.1

The guy2 who popularized the pyramid scheme was probably named “Ogg” (yes, with two g’s) and drew his circles on a cave wall.

Although doomed at birth by the same disease, called mathematitus, pyramid and Ponzi schemes are in fact a very different organism.

A Ponzi scheme differs from a pyramid in two primary ways. First, a Ponzi usually has a single administrator (perpetrator) who acts as the hub for all transactions. A pyramid scheme is usually initiated by someone, but then he initiates others to perform the same recruitment process. Eventually everyone in the scheme not only invests into it but does so with at least the intention of enticing others to invest as well. A Ponzi has one prep and many victims. A pyramid has many perps and many victims, and most participants are both.

The second, and most key distinction between a Ponzi and a pyramid involves the amount of each investment that is paid back to the participants. In both schemes the proceeds promised to each investor is always greater than their original investment, of course, but how this is accomplished is where the chasm between the two schemes widens by miles. In a Ponzi, for every dollar paid in there is more than one dollar paid out. In a pyramid there is usually a small portion kept by the promoter (his “administrative fee”) and the rest, but never more than one dollar total, is used to pay off previous participants. For example, Charles Ponzi promised a 50% return on investment within 45 days. So if Paul gave him $1,000, he needed to come up with another $500 within 6-7 weeks to cover his promised $1,500 return. How he did that was by finding Peter, another $1,000 investor, and using half of his investment to pay off the first investor (as in “Robbing Peter to pay Paul”). But now the second investor will be expecting a $1,500 payment, so Ponzi had 45 days to find another $1,000 investor. His investment, added to the remaining $500 from the previous one, allowed him to pay off the second investor. Although now, with no money left in hand, and needing two more $1,000 investors to pay off the $1,500 promised to the third investor, he had no problem finding them since the first two happy investors were giddily telling everyone they knew about the success they just had with Ponzi’s amazing investment opportunity3. So if 100 people paid Ponzi $1,000 each ($100,000 total) he, personally, would have to come up with $150,000 to pay them all off and make everyone happy. In a pyramid scheme the total amount promised in payments is never more than the total amount paid in. For example, in the “Airplane Game”, a classic pyramid scheme from the 70s and 80s, a participant paid $1,500 to participate. Once they had filled their 2×3 matrix (two “co-pilots”, four “crew members” and eight “passengers”, or 14 total participants) they become a “pilot” and cashed out for $10,000. However, 15 participants (including the “pilot” himself) generated $22,500 into the scheme, well more than was needed to pay off the “pilot”. Yes, a chunk of that $22,500 would also be used to pay off the two “co-pilots” when they promoted to “pilot”, but by then they would have each brought in eight more $1,500 investors. Here’s another way of defining the difference: If every participant in a Ponzi scheme were to simultaneously demand only their initial investment back, the funds would not be there to pay anything at all to most of them (as Madoff’s victims discovered). However, if this were to happen in a pyramid scheme, sufficient funds should still be in the bank (or, more likely, stuffed in a grocery bag under the bed) to cover most repayment demands (less that “administration fee”).

Let’s put this in networker marketing pay plan terms, if only for a moment. If a plan actually paid 20% down seven levels, a 140% total pay out, that would likely be a Ponzi scheme regardless of the value of the products sold. The plan pays out more than it takes in. If a plan paid 10% down five levels, a typical 50% pay out, it cannot be a Ponzi scheme since it does not pay out more than what it takes in (no more than 50 cents is paid out of every dollar paid in). However, if there is no product involved, or the product could have no value to a bona fide end user who is not participating in the scheme, then it could still very well be considered an illegal pyramid.

And that’s where legitimate multilevel marketing companies break away from the pyramid/Ponzi branch of the “income opportunity” family tree. In fact, if we were to create a chart similar to the “biological classification of organisms”, multilevel marketing programs wouldn’t even be in the same Kingdom or Phylum, let alone be the same Genus or Species. Where the branching occurs would be all the way up at “legal” and “illegal”. Much like the presence or absence of a spine will determine an organism’s Phylum (us humans are vertebrates), so does the presence or absence of a bona fide product of value in our comparable classification chart. Indeed, it is the very backbone of a strong, legally sound MLM opportunity.

Although rare, some MLM plans have goofy pay out structures where the various percentages do add up to over 100%. If true, this could be deemed a Ponzi scheme. However, it never is. The excessive pay out is always an illusion. Usually the company is applying these percentages on points, not dollars. This is often called “Bonus” or “Commission” volume (BV or CV), and the points are typically around half of the wholesale dollar value. For example, it’s easy to pay 10% down eleven levels (110%) when a $20 product applies only 10 points to the pay plan (i.e. they’re only paying these commissions on half the product volume). An MLM program is hardly ever even accused of being a Ponzi scheme unless the accuser is simply ignorant of the definition.

Pyramid scheme is another issue. As we have seen from myriad legal precedent, it is not the MLM model, nor even the type of compensation plan, that gets a company in the crosshairs of the SEC or FTC (or worse, ABC, CBS or NBC). It’s the type of product they are offering, or more specifically the motive for buying it. Yes, the complete absence of a product will cause more red flags to wave than a Russian parade, but pyramid promoters today rarely make their scheme that obvious (although, “gifting” programs would qualify). The vast majority of illegal pyramids – which are usually disguised as legal MLM opportunities – offer a mere token product that is purchased only to meet a quota, or one that is of value only to a distributor. For example, if your company has a private labeler crank out a basic, low quality fruit juice, then marks it up to $50 so they can afford the product they are really selling – “the most lucrative pay plan in MLM history” – you might be a pyramid scheme. If your company pays a bonus on the sale of sales aids, marketing tools (such as a web site) or opportunity specific training – all items only a distributor would buy that have no value to anyone else – you might be a pyramid scheme. If you’re selling a product that can realistically be resold, and has value to, a non-distributor, and that’s the only thing you can earn multilevel commissions from, then you’re very likely not a pyramid scheme. And, based on published statements directly from the FTC and several states, this would still apply even if most of those products were being sold to only distributors. Distributors can be customers, too. Again, it all boils down to their motive for buying the product. Are they buying it just to meet their qualifications? Not good. Because they love their company’s products and actuallywant them? Very good.

As I said, pyramid schemes today try to camouflage themselves to appear as MLM opportunities because they want to trade on our industry’s legality and legitimacy. This has become ironic in that their very efforts have created a guilt by association that has now causes our profession to become legally suspect. Rather than us raising their image, as they intended, they have dragged ours down. And now some regulators, and virtually all media, will at first glance see all ethical, professional, and legal MLM businesses as suspect. Basically, they’re profiling. Imagine if all bank robbers were to start dressing up as priests so they won’t raise the suspicion of bank security. Eventually, and quickly, every priest that walked into a bank would become more suspicious! That’s what’s happened to us.

There are pyramid schemes, there’s its cousin the Ponzi scheme, and there are multilevel marketing opportunities. Most associate a pyramid with a Ponzi and via versa. Alas, only the one with the least amount of common DNA, only multilevel marketing, suffers a guilt by association with both.

 

1. With $785 billion collected from 163 million workers and $585 billion paid to 50 million recipients, it’s still not quite there – yet.2. And it probably was a guy – check out my article Silent Sirens3. Which Ponzi claimed was based on profits earned from international postal reply coupons.

2.  And it probably was a guy – check out my article “Silent Sirens” at www.marketwaveinc.com/articles.asp.

3.  Which Ponzi claimed was based on profits earned from international postal reply coupons.

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Product Return “Gotcha’s!”

January 10, 2009 Leave a Comment

By Len Clements © 2008

As the annual convention for the Distributor Rights Association (www.mlm-dra.com) and the Multilevel Marketing International Association’s (www.mlmia.org) first Distributor Conference fast approach, it got me thinking about all the ways that MLM companies design their written policies (and unwritten tactics) to protect their own interest. After all, the Distributor Agreement we all signed represents what the distributor agrees to do. Distributors never ask the company to sign a company agreement. So, naturally, the regulations and policies described in these agreements are pretty one sided in favor of the company.

Fortunately, most MLM companies don’t abuse this power, and they show great discretion and some latitude in applying their policies. They recognize that their distributor force is their lifeblood, and they try not to disenfranchise and discourage them.

Unfortunately, some don’t get it. Product return policies, and more importantly practices, are one area where the company’s true attitude towards their distributors are exposed. No company, in any industry, likes to give back money. But in many cases that return can eventually be profitable. Good will, trust, positive image and reputation are created by making people happy. Lack of a return can result in a far greater cost. One famous (now infamous) MLM company refused the return of product to about 20 people, who all filed complaints with the state AG. Those complains triggered an investigation of the company resulting in its eventual closure and a criminal indictment against the owner. The total amount of refunds requested by these 20 people was $8,000. It was probably the costliest eight grand an MLM company ever saved.

Here are a few ways some companies can getcha’ when you try to return product.

1) Most company policies state that the products can be returned if they are in the current product line. So every 30-60 days they make small, token changes to the formulations making most of the inventory in circulation “outdated” and thus ineligible for return.

2) The company recommends that the product be opened and inspected, cleaned, or loaned out, and then refuses to except it back because it is no longer in “resalable condition.” A couple major water/air purification companies used to do this. They would recommend that the water filter units be opened and “flushed” before attempting to sell them, and/or they trained their reps to use the very effective “puppy dog” marketing approach (where you lend the unit to a prospect for a week, they get attached to it and buy it rather than have you take it back). Of course, once the unit is used in this manner it becomes, well, used. And you can’t return it.

3) They accept returns within a short period of time, say 15-30 days, then stonewall the process until it’s beyond the return period. Either they’d claim the RA number wasn’t valid, they never received your written request, you sent the products back to the wrong address, you call to get an RA number and you’re put on hold until you give up, your call is never retuned, etc..

4) By returning your entire inventory your distributorship is automatically terminated and you may never reinstate it. Of course, most people who return everything are probably quitting anyway, but not always. And even if they are the fear of never being allowed back can be dissuasive (fear of loss is a very powerful motivator).

5) The company applies the ol’ “70% rule.” That is, they state in the P&Ps, and many times right on the order form, that “70% of all previously purchased inventory must be resold or consumed” before another order can be placed. Naturally, the distributor orders anyway regardless of how much inventory is still remaining. Then when you try to return your inventory the company says, “But wait… you agreed not to place any orders unless at least 70% of your past orders were gone, so we’re only accepting 30% of your inventory back” (which may still be subject to other discounts as described below). If you explain that you actually still have most of your inventory, they will counter by claiming you then violated policy by continuing to purchase more.

6) Here’s the most common tactic (the other five are, fortunately, not common practices): In virtually every distributor agreement it says that the products can be returned less a 10% restocking (admin, handling, etc.) fee, and “less any commissions paid.” The distributor usually assumes this means less any commissions paid to him or her – and many times that is what it means. But sometimes it means less the commissions already paid to your upline on those products! So if the plan pays, let’s say 50%, then you are really going to get a 40% refund (50% commissions paid plus 10% restocking fee) not a 90% refund. The phrase “less commissions paid” is rarely clarified as to which method will actually be used.

7) Then there’s this classic – which has only happened once, to my knowledge. And this is absolutely a true story (that will be hard to believe).

The CEO of an MLM company noticed that quite a few bottles of their weight loss capsules were being returned only partially used. So he sent a notice out to all distributors that since the entire 30 day supply of the product had to be used before the results could be fairly judged, the company was no longer accepting returns of this products… unless the bottle was returned empty!

No need for the DRA’s assistance on this one. Most distributors found a way around this policy all on their very own.

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GasUpUSA: Points of Concern

January 12, 2003 Leave a Comment

By Len Clements © 2003

GasUp USA claims to offer a pre-paid gas card that provides a “21% savings” on gasoline purchases, as well as a discount benefits package, and most recently telecommunication services.  While the corporate web site seems to emphasize the benefits package and long distance service a bit more than the gas card (and more and more so as time goes by), the overwhelming emphasis in the field seems to be on the idea of getting cheaper gas.  Clearly that’s the focus of the program.  After all, the company is called “GasUp USA” (here on called “GasUp”).

Basically, the program works like this:  You enroll as a “Member” for $174.98 ($159.99 plus a $14.99 “check processing fee”), which is renewable annually.  It costs $99.99 to enroll as an “Independent Representatives” (IR), which gives you the right to sell memberships and build a downline.  However, if you enroll as a member as well, the $99.99 IR fee is waived.

The membership entitles you to a fairly comprehensive but typical benefits package offering various products and services (discounts on hotel rooms, rental cars, doctor visits, grocery coupons, legal service, free credit card protection, and much more).  As a member you also have the ability to purchase prepaid gas cards that allegedly save you 21% at the pump.  Members can only use the membership benefits, but can’t sell memberships or earn downline commissions.

As an IR you can enroll other IRs and sign up members and they are all placed in your downline.  Bonuses and commissions are based on a binary compensation plan.  You earn up to $100 for every nine members that fall below you (with a minimum of 3 in one leg) plus a free gas card.  GasUp claims their binary is “non flushing,” meaning all unpaid downline volume carries over with no maximum limit.

GasUp launched on July 1st, 2002 and claims to have 78,000 members (as of 1/17/03).1

The two greatest concerns I have deal with the legality and the financial viability of the program.

Pyramid Concerns

The question here, as it always is when dealing with this not so cut and dry issue, is;  Can the last person in make money from all income sources? In other words, are there any types of compensation related to GasUp that are directly tied and dependent upon the recruitment of distributors (IRs).

Technically, the answer is no.  But here’s where it’s not so cut and dry.  Many quasi-MLM programs have been attacked or shut down by regulators for being illegal pyramids that had perfectly legitimate products of value.  Jewelway and Equinox come to mind.  The challenge relates to the motive for buying the products.  Did the reps really want the products, or were they just buying them as a token act to meet a quota in the comp plan?  If only reps are buying your product, then you would have to recruit to make money.

The only reason I see that someone would buy a GasUp membership is either to get the discount benefits package, or the discount on gas.  However, comparable benefits packages sell for less than half the GasUp membership fee elsewhere.  I’ve found one almost identical offered for $199 for five years (rather than $174.98 for one year).  In fact, selling benefits packages at an inflated price to support an MLM comp plan has already been legally challenged – and failed.  There were a rash of such program in the early 90’s, the most notable of which was called Consumer’s Buyline (CBI).  CBI offered a similar package for $270 per year, and they were one of the cheapest.  However, they were declared an illegal pyramid because such packages at the time were normally going for around $35 per year, so it was viewed (by the AGs of several states) that, although the package itself may have had true value, it was only being purchased by reps who needed to qualify for income.  Same with FundAmerica in the late 80’s.  They had sold 95,298 memberships and had 88,960 distributors (an average of 1.07 members per reps).2  

So while the $174.98 price tag is dubious on it’s own, there is another aspect to the membership – the alleged gas discounts.  The problem here is, this isn’t really a discount on gas, it’s a discount on cash!  The “gas card” is really just a debit card that can be used on any item the gas station sells.  You could use it for auto servicing, tires, candy, beef jerky, milk, or what ever else is in the station’s store.  This debit card comes loaded with a $25 balance, and you buy it for $19.75.  So, when you fill your tank and the pump says $25.00, you pay the station $25.00 – but you bought that $25 for $19.75.  So you didn’t get a 21% discount on gas from the station or gas company, you got a 21% discount on cash from GasUp USA.

Basically, the program is designed as follows:  If someone pays $174.98 cash to become an IR/member, then gets 9 others to pay $174.98 cash (for the right to obtain $25 in exchange for $19.75), they earn $100 cash, plus $25 (for the free gas card).  So, what exactly is the product?  It appears this entire transaction (between GasUp USA, the IR, and the members) is simply an exchange of various forms of cash.

Now, would someone pay $174.98 just for the benefits package (with no interest in the income opportunity)?  Arguably not.  Throw in the right to exchange $19.75 for $25.00, and allow members to do that eight times a month, and you’ve got a deal!  That’s like getting a $504 rebate on your membership ($5.25 profit per card, eight times per month, times 12 months).  That’s a $329 profit and you haven’t even used the benefits package yet.  But then, whether or not discounted cash validates the membership has yet to be tested in court.

But it may soon.  The Attorney General’s office of Kansas issued a warning to consumers on Nov. 22nd 2002 calling GasUp a “pyramid scheme” and citing that the benefits package “appears to be readily available to consumers (elsewhere) at no cost.”3

On December 6th of 2002 the Idaho AG’s office issued a “Consumer Alert” siting GasUp reps in that state were claiming GasUp was “reviewed, approved and endorsed” by the Attorney General himself.4  The alert not only adamantly denied any such approval or endorsement (no AG of any state would ever do this for any company), it went on to include a short primer on what factors they look for in determining whether a marketing program violates Idaho’s pyramid law.

Another legal red flag involves GasUp’s no refund policy.  What are commonly referred to as the “Amway safeguards” (based on the FTC vs. Amway case of 1979)5, which all responsible MLM companies attempt to abide by, include a full refund policy (less a standard 10% fee).  Stated in red letters on the on-line enrollment form is the statement: “All Sales are final.  GasUpUSA is unable to offer refunds.”6

Finally, there is much legal precedent that simply paying multilevel commissions on “memberships” is legally problematic.  Especially when those members, who are not participants in the income opportunity, are structured into the downline matrix right along with the reps themselves.  In such cases, income is not derived from the retail profit of a sale to an “end user” but rather entirely from overrides on the downline.  In GasUp, there is no provision for retail profit.  You don’t buy a membership at wholesale, mark it up and resell it at a profit.  Reps buy a membership for the same price as non-reps, and they all go into a 2-wide matrix structure (such is the downline hierarchy in a binary compensation plan).  For example, in the case of Missouri vs. Membership Marketing (a/k/a Five Star Plus)7, the Attorney General sited the fact that “there is no resale outside the matrix.”  In the case of Illinois vs. Unimax8 (a membership based pyramid scheme), the AG made the case that “commissions earned by marketers are contingent not on sales of any goods or services (outside the comp plan)… only on bringing new individuals into the Unimax plan. The greater the number of subscribers a marketer sponsors, the greater his monthly commission check will be.”  Note the AG here again takes issue with non-rep customers (subscribers) holding positions in the downline right along with distributors (marketers). 

Ponsi Concern

Ironically, the very thing that may (emphasize may) get them off the hook on the pyramid issue, the gas card, raises the greatest potential legal challenge of all.  It could easily cause GasUP to be declared a Ponsi scheme.

[For a detailed description of a pyramid and a Ponsi scheme, and the difference between them, go to http://www.marketwaveinc.com/articles/pyramid.asp]

Put simply, a Ponsi scheme is one where the payout is greater than the income for each transaction, thus requiring an endless and ever increasing supply of participants to maintain the scheme.  For example, Charles Ponsi, back in the 1920s, offered a $1,500 return on a $1,000 investment.  The $500 difference came from the next investor’s $1,000 payment, and so on.

I don’t want to get bogged down in a technical analysis of the binary pay plan, but trust me when I say (because I have done an extensive technical analysis of the binary pay plan) when one doesn’t “flush” volume, it essentially pays infinitely deep.  Most plans base their stopping point on a certain number of levels, say six.  Volume below that level is outside the pay range of the plan.  Binary plans base their stopping point on sales volume, typically $5,000 in each of two legs, which in most cases comes out to about six levels of people, so not a lot of difference, just different methods of arriving at the same goal.  That being, to avoid paying infinitely in depth – because if you did you’d go bankrupt!  Some binary plans in the past have already tried this “no flush” gimmick.  Sure enough, the larger the national sales force got (i.e. the company’s downline) the higher the total payout skyrocketed (I’ve been involved as a consultant in specific cases where this happened, so this isn’t theory).  Then, along came the non-flushing binary with the “cap” on payout.  The now defunct SkyBiz was one of the first.  They had a 70% cap on their payout, so although they bragged about not flushing volume, they effectively created the same depth limitation by capping the overall payout itself rather than the volume or the levels you are paid on.  GasUp USA does the exact same thing.  It’s just smoke and mirrors.

So if GasUp is paying out 70% of the membership fee in commission this would potentially leave them with a gross profit of $48.00.  Therefore, it would seem that after the ninth card is purchased by the member (sometime early in their second month), GasUp USA would be operating at a net loss.  Even if the plan actually pays less than 70% now, it is mathematically inevitable that it will reach the 70% cap since they are not “flushing” the excess volume.  Since it would behoove the member to take full advantage of the eight card maximum purchase per month, GasUp USA would be exposed to a potential $456 per member loss, per year ($504 – $48).  This isn’t even considering the up to $750 per month in free gas cards that an IR can earn (creating a potential additional net loss of $9,000 per year).  What other revenue source is in place to compensate for losses of this magnitude?  GasUp claims they exist – in the FAQ section of the corporate web site, where they attempt to address this questions specifically – but fail to mention exactly what they are.

It gets worse.

The discount benefit package has a wholesale cost to it.  I tried to find out what that is from the “American Benefits Counsel,” the organization that GasUp claims is supplying the package.  The only problem is, “American Benefits Council” (note the different spelling of the last word) doesn’t supply such benefit packages and they had never heard of GasUp USA until recently when they started getting calls asking about them.  They are also considering legal action against the “American Benefits Counsel” for trademark violations9 – assuming such an organization even exists (an extensive web search using the word “Counsel” failed to locate such a company).  However, according to research done by Corey Augenstein (MLM Insider)10, such packages typically wholesale for under $15 when bought in bulk.  What ever the amount, that must also be deducted from the gross profit on memberships.

There’s more.

According to the GasUp application the $99.00 charge to be an IR only (without a membership purchase) was “at cost.”  The fee was waived if the enrolling IR also purchases the membership.  But, if it costs GasUp $99.00 per year to administer a distributorship, how is that cost eliminated just by eliminating the fee?  Assuming the “at cost” claim is truthful (a generous assumption), then an IR’s membership would provide GasUp with an annual gross profit of $60.95 ($159.99 – $99.00).  But, we still have to deduct that 70% pay out!  That’s a loss of $51.00 even before the first gas card is purchased!  Subtract the $504.00 in annual loss on the card and GasUp is in the red $555.00 per member.

Of course, very few, if any, will sign up for $99.00 and not buy the membership.  To even have it on the application is window dressing.  But still, is there a $99.00 cost to GasUp, or isn’t there? Curiously, the “at cost” claim was recently removed from the on-line application.  However, it is symptomatic of an illegal pyramid for an MLM company to make a profit on distributor fees, sales aids, or enrollment kits (else the company is making a profit from recruiting).  If the $99.00 IR fee is still “at cost” then everything I just described is accurate.  If it’s not, then their claim was deceptive in the past, and they’re making a profit from distributor fees now.  It’s a no win situation.

GasUp makes a rather lame effort to address this “how can we do this” question in the FAQ section of their web site11.  Here’s what they say:  “This (the gas card) is a promotional item that is taken advantage of by a relatively small number of our customers, but is viewed as an attractive option from a marketing standpoint.”  I guess they deserve credit for being candid.  But really, what did they just say?  First of all, the ability to exchange $158 for $200 every month is exercised by a “relatively small number” of members?  That’s pretty hard to accept, isn’t it?  Especially considering it was such an “attractive” option when the member enrolled.  Elsewhere in the GasUp web site they state, “You ask 10 people if they want to save money on gas, and 10 people will say yes.”  I agree.  So why would a “relatively small number” of those who signed up for this actually do it?

They further state: “Although it is attractive from a marketing standpoint for consumers, the gas card bonus is of more interest to our representatives in their compensation payout and the overwhelming attraction to consumers is the extensive array of consumer benefits in the consumer services package that we sell to the retail consumer.”  But, IRs and non-IR consumers have identical membership privileges.  Is GasUp suggesting that IRs are not heavily emphasizing the ability to trade up $158 for $200 every month to consumers?  Or that consumers are not overwhelmingly attracted to this aspect of the membership?  But they do have an “overwhelming attraction” to overpaying for a discount benefits package that they could get from numerous other sources cheaper? Come on.

Even if we assume GasUp’s explanation is accurate – that is, they can afford to trade $200 for $158 because so few members ask them to – what if the average IQ of their 78,000 members suddenly rises 50 points and they do?

Where is the difference coming from?  How can GasUp afford to do this?  According to GasUp, “We look upon this as a marketing expense, traditional retail companies spend millions on advertising. We plan to spend millions helping people save on gas.”  This rationale has typically been used by other MLM programs to explain the pay out in their comp plans – that is, it’s an expense in lieu of advertising.  I’ve never heard of a company deliberately building in a net loss on one of their main products and calling it a marketing expense.  But I do agree with their statement – it’s going to cost them millions.

If, indeed, they are paying out more than they are taking in, then they will need an infinite number of new members to pay off the previous members.  Right now, GasUp is very likely profitable.  In the beginning they get the full annual membership income, and the expenses are burned off over the year. With only about half of the annual expenses paid out so far on the earliest members (those who signed up in July), and most memberships less than three months old (they averaged 331 new members per day their first 134 days, and 508 their last 66 days), GasUp is likely rolling in cash.  However, based on the most optimistic scenarios (like the one described below) GasUp will start losing money on the average membership sometime during the second six months.  There’s already anecdotal evidence of a cash flow squeeze by the recent 16.7% increase in membership fees.  Previous to Jan. 1st, the membership was $149.99.  Although the company’s 24 hour recorded opportunity call still sites this price (17 days after the price hike), the cost now actually totals $174.98.

Let’s be very conservative and assume GasUp is only paying out 50%, and the average member only buys one-fourth as many cards as they are allowed (so we’re assuming they voluntarily choose to forgo $31.50 in free cash every month – that being, six of the eight cards they’re allowed to buy).  Here’s what would happen:

Income

Membership $159.99

24 Gas Cards (2 per mo.) 474.00

Total annual income $633.99

Expenses

Annual IR “cost” $99.99

50% payout on membership 80.00

24 Gas Cards (2 per mo.) 600.00

Total annual expense $779.99

Total net loss $146.00

As of this writing GasUp claims to have almost 78,000 members since their launch in July of 2002.  Even if we further assume, absurdly optimistically, that 100% are members and none are IRs thus eliminating the $99.99 IR administration cost completely (or, we assume it’s actually far less than the stated $99.99), GasUp is still bound for a first year loss of over $3.5 million!

If we assume, worst case, they are paying out 70%, it really costs them $99.99 to administer an IR for a year, and virtually all members are also IRs, and members take full advantage of the eight card purchase limit per month, GasUp will lose over $43 million their first fiscal year.

Or, split the difference and they lose about $23.3 million.  No matter how you cut it, at their current pace, they’re going to lose millions.

And all of this isn’t even counting the day to day operating expenses (I’m assuming the $14.99 annual check processing fee is a break even deal), the cost for the benefits package, or the up to $750 per month in free gas cards that can be earned in the comp plan.

The only other revenue streams available to GasUp are small fees charged to maintain the gas card, and whatever small profit they make from reselling a newly offered long distance and cell phone service.  But these would likely make up only a small fraction of the loss. 

But then, this all also assumes GasUp management doesn’t wait until the inevitable point where cash flow peaks, then just as it begins it’s slide down the other side of the bell shaped cash flow curve, dump the whole scheme and walk away.  I’m not saying they will, nor do I have any information that suggests that’s the plan.  It’s just the one that would make the most sense, at least financially.

Management and Company Concerns

Would GasUp management do such a thing?  I have no idea.  What I am pretty sure of it what constitutes libel – so let me be very clear about this:  I define “scheme” and “scam” quite differently. An illegal scheme is one where it’s founders and operators may be genuinely unaware of it’s illegality, and may have true and honest intentions.  They’re not bad people, they’re just ignorant of the law.  Then, their are those who run scams.  These people are very much aware that what they are doing is wrong, and don’t mind hurting others to effect their own financial gain.  Is GasUp a scheme or a scam?  Again, I have no idea.  I’m not a mind reader.

Having said that…

GasUp “management” appears to be a team of one – Mr. Eric Dalius.  In the “Company & Leadership” section of the corporate web site,12 there is only a brief bio of Mr. Dalius, GasUp’s founder and CEO (the first five-plus months the company was in business, the company profile page read only “Coming Soon”).  His bio states that he earned a bachelor’s degree in marketing from Penn State University and has 13 years experience in network marketing.  He also claims to have had great success in the areas of mass-marketing, telecommunications, nutritional products, internet services, and travel. Prior to network marketing, Mr. Dalius worked with a Fortune 500 telecommunications company and was a top sales representative.

What his bio fails to mention is that he was fired from that company (MCI) in May of 1995.  According to a suit filed by MCI, Dalius and others defrauded MCI and infringed on it’s trademark by selling free calling cards as part of a kit for a nutritional products company.

Also in 1995 Mr. Dalius was investigated by the U.S. attorney general’s office and his office and home were search and records seized by the FBI.  He was co-owner of a company called Telecom Solutions which was accused of wire and mail fraud.  Some cards sold by Dalius’s company were inoperable.  Others were offered at a rate of 1,030 minutes for $100, or 9.7¢ per minute (a great rate at the time).  However, the cards were really for only 30 minutes and the 1,000 minutes were a “bonus” that was “subject to availability” – which Telecom failed to mention on the order form.  The company was also accused of refusing to pay refunds to customers that claimed they never received their card or the card didn’t work.

In January of 2000 Eric Dalius was formally indicted by a federal grand jury on fraud charges related to Telecom Solutions.  According to the indictment Telecom accepted money for calling cards before they ever contracted with a long-distance carrier (eventually, AT&T and LCI did provide service, but cut off Telecom for non-payment).

In April of 2000, before a U.S. District court, Mr. Dalius admitted to conspiracy to commit fraud and wire fraud.  He was fined $38,000 and sentenced to one year in a work-release center.13

The Pennsylvania Better Business Bureau reports that GasUp has resolved all complaints presented to it. The complaints “have alleged failure to deliver the promised card and inaccuracies about the company’s promotion as stated on the website… failure to credit consumers’ accounts and also dissatisfaction that the company’s phone line is constantly busy.” GasUp has responded in most cases by providing refunds (in spite of their own “no refund” policy).14

GasUp corporate recently announced that they were changing banks.  In a public announcement they claimed they had “out grown the operating parameters of our current financial institution” and in addition their move to take GasUp global had forced them to “ally with a banking institution that can handle banking procedures of the magnitude in which we are currently dealing.”  This was offered as part of an explanation as to why checks would be a week late.

Their bank was Patriot Bank.15  When I called them to ask about GasUp I was informed they do not discuss client relationships, or ex-clients in this case.  So I called back later and posed as a potential business client.  I inquired as to their limitations and global capabilities and was curtly informed that Patriot Bank has been in business for almost a century, has almost a billion dollars in assets, is publicly traded on the NASDAQ (symbol: PBIX), and were perfectly capable of handling the banking needs of “Microsoft” were they a client.  Curious.  They could handle the banking needs of Microsoft, but not GasUp USA?

After speaking with GasUp’s current bank, First Union (soon to be merged with Wachovia Bank)16 I discovered that they are not conducting an “internal investigation” of GasUp and they are (at least as of Jan. 16th) accepting for deposit GasUp commission checks, contrary to internet rumors. 

However, according to a confidential “corporate update” e-mailed to GasUp field leaders, as of December 24th Patriot bank has frozen the funds of GasUp USA allegedly to cover any potential charge backs.  This likely explains why commission checks are now almost four weeks late.  The update alleges that there will be a court hearing on Friday, January 17th, in an effort to have the funds released.

Based on my experience over the years as a consultant to start up MLM companies, it is a standard practice during the prelaunch phase to become a member of the Better Business Bureau (a simple and inexpensive process) and to trademark the company name and slogans.  Curiously, now almost seven months after their launch, GasUp USA has done neither.

GasUp did hire Gerald Nehra17, one of the most reputable MLM attorneys in the country.  Last October Mr. Nehra resigned as their attorney siting only a “conflict of interest.”  Maybe that’s why he’s one of the most reputable attorneys in the country. 

Conclusion

Until a lot more questions are answered, and the smoke clears from the legal arena, I would strongly recommend that GasUp USA be avoided.

And yes, I did attempt, more than once, to get my questions answered directly from Mr. Dalius.  He has failed to respond.

 

1. http://www.gasupusa.com
2. http://www.mlmlaw.com/library/cases/mlm/feddistrict/canguyen.htm
3. http://www.ksag.org/contents/news-releases/2002news/gasupUSA.htm
4. http://www2.state.id.us/ag/newsrel/2002/pr_dec062002.htm
5. http://www.mlmlaw.com/library/cases/mlm/ftc/amway.htm
6. https://www.gasupusasecure.net/signup.asp?pagename=
7. http://www.mlmlaw.com/library/cases/mlm/state/momember.htm
8. http://www.mlmlaw.com/library/cases/mlm/state/ilunimax.htm
9. http://www.worldwidescam.com/gasupabc.htm
10. http://www.mlminsider.com
11. http://www.gasupusa.com/faq.asp?pagename=
12. http://www.gasupusa.com/about_us.asp?pagename=
13. http://pqasb.pqarchiver.com/mcall/  (search for “Eric Dalius”)
14. http://www.easternpa.bbb.org/report.html?compid=B5000946
15. http://www.patriotbank.com/
16. http://www.wachovia.com/welcome/?targetHost=www.firstunion.com&targetPath=/
17. http://www.mlmatty.com

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