Alert #173: 3/25/2011

Barry Minkow Charged With Securities Fraud

Ex-Con to Plead Guilty to Charges Alert Subscribers Knew About Four Years Ago

Anti-MLM critic and so called “fraud buster” Barry Minkow, who was convicted of securities fraud in connection to his ZZZZ Best carpet cleaning business in the 1980s and served over seven years in prison, was accused today of conspiring to commit securities fraud on (non-MLM) homebuilder Lennar Corporation. This follows an earlier charge of insider trading.

Federal prosecutors are accusing Minkow of spreading false information about Lennar using online press releases, emails to the media, online videos, and his own “Fraud Discovery Institute” website between January of 2009 and April of 2010. Prosecutors believe Minkow was trying to decrease Lennar’s stock price for his own personal gain, and to compel Lennar to pay a coconspirator which had previously lost a lawsuit against Lennar. The conspirator, believed to be real estate developer Nicolas Marsch, hired Minkow to beat up on Lennar allegedly to extort a cash payment from them.

According to court documents, Minkow’s statements “alleged widespread improprieties in Lennar’s financial reporting and business structure, and attacked the personal character of Lennar’s management,” with “reckless regard for their truth.”

Lennar’s stock dropped 19.9% percent after Minkow’s first Lennar report, which was followed by 12 more public hits on Lennar, either by way of a press release, new investigative reports, or online videos. Lennar’s stock dropped after 10 of the 13 total attacks possibly costing innocent Lennar shareholders over $861 million[1].

In an earlier and separate civil action Minkow was sued by Lennar for libel and extortion and was ordered by a Florida State Court judge to pay sanctions that could amount to “hundreds of millions of dollars” for a variety of acts designed to fool or mislead the court. You can read more about this action here:

The actual order can be viewed here:

This new federal charge is a criminal action that could send Minkow back to prison for up to five years. You can read a recent news report about this action here:


Bloomberg (video):

Minkow has recently resigned as lead pastor for the San Diego based Community Bible Church. The church’s website states Minkow “has informed the church that he will plead guilty to one criminal count related to a lawsuit with which he was associated”.


Barry Minkow and his “Fraud Discovery Institute” began attacking M.L.M. companies in March of 2007. You can read the whole story in the comments section of Alert #165. Basically Minkow would hire uber-anti-MLM critics Robert FitzPatrick and Tracy Coenen to help him create smear campaigns against public M.L.M. companies which he would take short positions in (he purchased put options which allowed him to profit by the company’s stock going down). His tactic would be to do exactly what federal prosecutors are now accusing him of doing with Lennar. That is, use his media bestowed credibility to trash publicly traded companies so he could make money when their stock would go down. He’d accomplish this by making false statements about the company’s legality, ethics and financial viability. In some cases, such as his attack on Usana Health Sciences, Minkow was also paid by other short sellers so they could profit from the stock drop, too. In Usana’s case Minkow was paid $200,000[2] by fellow stock-fraud felon Sam Antar and another $50,000 by two hedge fund managers.

Of course, MarketWave Alert subscribers knew of Minkow’s bash-n-cash scheme four years ago. You can read my various rebuttals to Minkow’s M.L.M. company attacks HERE (see the documents listed in red).

What’s most sad about this is that the over $2.8 billion in total losses Minkow may have caused the innocent shareholders of his victims[3] might have been avoided had the mainstream media taken these rebuttals seriously rather than ignoring them. Instead, they kept on promoting Minkow as a credible, reformed scam buster. In fact, the Wall Street Journal would routinely report on Minkow’s attacks, giving them that much more credibility. After Minkow first turned his crosshairs on public M.L.M. companies with his Usana hit piece I contacted the WSJ reporter who was, at least inadvertently, supporting Minkow’s attacks. I made him aware of all the evidence I had that Minkow and his cohorts, FitzPatrick and Coenen, were unjustly attacking this and other companies based on bogus information. It was not until about a year later, after a Minkow induced SEC investigation of Usana and three separate class action lawsuits (one shareholder, one derivative, and one distributor) were all dropped with no finding of wrongdoing on Usana’s part[4], that this writer confided in me that he had only just then went back to read my rebuttals and “really wished I had read them back when you first sent them”. His supportive Minkow article he claimed he was working on never appeared in The Wall Street Journal, and he never wrote about any of Minkow’s attacks again.

Even more evidence that Minkow is still not telling the truth occurred during an interview with a local ABC news affiliate in San Diego last February. According to the article, Minkow claimed “We had 24 cases, 23 led to convictions” and that the Lennar case was “number 24”. I guess Barry’s now infamous selective memory must have been engaged during this interview, and he just forgot about Usana. Or Herbalife. Or Prepaid Legal. Or Medifast. Or, for that matter, the non-MLM company InterOil (IOC) that he shorted and trashed. Not only did none of these cases involve any “convictions”, Minkow failed to get any legal authority to take any action against any of these companies of any kind! He just shorted them, bashed them, then cashed out.

It’s also interesting to note how Tracy Coenen unconditionally and obligatorily repeated, supported and defended each and every one of Minkow’s accusations against Lennar (as she did with Usana, Herbalife, Medifast, and others), going so far as to declare that their CEO “blatantly lied”, Lennar exhibited a “pattern of fraud and deception”, and Lennar was perpetrating a “giant Ponzi scheme”. She even titled one of her blog entries “Being right feels so good” when she thought her and Barry had proven one of their many accusations. Tracy is usually quite the chatterbox when it comes to defending her position and credibility, yet she doesn’t seem to have anything to say about Lennar right now (she’s removed all of her many blog posts about them, but I have copies). She also doesn’t seem too keen on defending Barry anymore. She hasn’t offered a word of support (and yes, Tracy, being right does feel good 🙂 

It’s also odd that Minkow has left his website online in spite of the fact he hasn’t updated it since June 4th, 2010, and it still defiantly showcases both his Lennar and Medifast smear campaigns, including his supposedly upcoming Lennar documentary called “Two Big To Go To Jail: The Lennar Story“, and his own autobiographical movie. Yes, there is a movie about Minkow’s life, titled simply “Minkow” (which was originally to be called “Redemption”), staring Minkow playing himself along with a great cast, including James Caan, Mark Hamill, Ving Rhames, Talia Shire, and Justin Baldoni (as a young Minkow). It was due to be released sometime this Spring, but due to recent events the director has suggested the ending may need to be revised.

I hope they allow cameras in prison.

Len Clements
Founder & CEO
MarketWave, Inc.

[1] Based on an analysis of change in Lennar’s closing share price the day previous to the Minkow attack and the day of the attack, and factoring out the change in the overall market (based on S&P 500 index) during that same period.

[2] Minkow claims Antar only paid him $100,000 for his Usana report, and the other $100,000 Antar paid him, right about the time Minkow first began his Usana investigation, was simply a gift due to Antar’s “admiration” for Barry.

[3] Based on the analysis described in footnote #1.

[4] The SEC “informal inquiry” was dropped with no action taken, two lawsuits were dropped by the plaintiff, and another was dismissed on summary with the judge declaring that the claims made against Usana, most taken directly from Minkow’s material, were not even “plausible”.

Alert #174: 4/4/2011

Minkow Pleads Guilty to Conspiracy/Fraud
Robert FitzPatrick to be Tried for Libel

Barry Minkow, who produced a series of elaborate, well funded attacks on a number of M.L.M. companies between 2007 and 2009, formally pled guilty last week to Conspiracy to Commit Securities Fraud related to his attacks on non-MLM real estate developer Lennar Corp. Although it’s been known for days that Minkow was to plead guilty, details of his offence have only now been made public.

According to numerous news reports and the FBI’s own press release, Minkow:

“…admitted that he abused his relationship with federal law enforcement agencies to report false allegations of criminal conduct purportedly committed by Lennar and its management. Once Minkow confirmed that his allegations had successfully induced law enforcement to open a criminal investigation, Minkow allegedly used that knowledge and information to trade Lennar securities for his own benefit.”

In other words, he convinced the FBI to investigate Lennar based on his false and misleading anti-Lennar reports, and once he learned of this inside information he then purchased put options on Lennar anticipating the FBI investigation would eventually go public and Lennar’s stock would plummet. Besides the fact this is “insider trading” (what put Martha Stewart in prison), Minkow also purchased his options secretly and denied under oath that he had ever “shorted” Lennar stock (that is, invested in such a way that he’d make money by their stock price dropping).

A great recap of the story can be found here:

Also, prolific anti-MLM critic Robert FitzPatrick, who is founder and chairman of the Pyramid Scheme Alert organization, had his SLAPP[1] motion denied in part related to Medifast’s libel suit against him. FitzPatrick was hired by Barry Minkow to assist in his production of anti-Medifast reports, a public M.L.M. company that Minkow had also shorted. Minkow and FitzPatrick claimed, among other things, that Medifast’s M.L.M. division, Take Shape for Life (TSFL) was an illegal pyramid scheme. The Medifast complaint alleged FitzPatrick had libeled both Medifast and TSFL as well as Medifast Executive Chairman and TSFL co-founder Bradley MacDonald. The court ruled in favor of Fitzpatrick and dismissed him from any libel charge against MacDonald personally, but did allow the libel charge to go forward related to FitzPatrick’s claim that TSFL violated California’s penal code 327 against “endless chain” pyramid schemes.

Also named in Medifast’s libel suit were Barry Minkow himself along with partner William Lobdell and not quite as prolific anti-MLM blogger Tracy Coenen. Minkow’s, Lobdell’s and Coenen’s SLAPP motions were all granted.

Online reports to the contrary, fellow PSA co-founder and even more prolific anti-MLM critic Jon Taylor did not directly participated in Minkow’s Medifast or Lennar attacks and has not been named in either lawsuit.


There’s a lot of interesting twists and angles to this case. Minkow and Coenen both produced commentary that clearly implied Medifast was operating as an illegal pyramid or Madoff-like Ponzi scheme, but the court essentially said that’s their First Amendment right to say as long as its their opinion, based on how Medifast appears to them, and they don’t specifically declare Medifast to be operating illegally. Although Coenen did cleverly pose her accusations as questions, or indirectly by letting Minkow and FitzPatrick do her dirty work and then quoting them, Minkow was over the top in his numerous, matter-of-fact declarations that Medifast was operating an illegal pyramid or Ponzi scheme in violation of the law.

The same thing happened in Usana’s civil suit against Minkow (now settled). The court ruled in favor of Minkow’s SLAPP suit[2] in spite of him having publicly declared Usana to be an “evil”, “fraudulent”, “illegal pyramid” that was a “crime in progress” and “doomed to fail” — because it was his opinion, based on how they appeared to him. Which begs the question, what exactly does someone have to say about an M.L.M. company for it to be considered libel by a California judge? The legal definition of libel requires a statement that can be “proven false”. That is, someone’s opinion that your business operation “looks like” a pyramid scheme can’t be proven false. If someone says your business is, in fact, an “illegal” pyramid scheme and sites the specific law it is violating, that can be proven false. In FitzPatrick’s case his undoing involved his specific declaration that Medifast violated CA penal code 327 against “endless chain” schemes. It would seem that the rule all anti-MLM critics need to follow now is, say the MLM company is an “evil”, “fraudulent”, “illegal pyramid” that is a “crime in progress” and “doomed to fail” – just don’t specify what penal code they violated. But hold on. Barry Minkow did, in fact, directly and specifically accuse Usana of violating California’s code 327.[3] Yet, the same California court (although within a different judge’s courtroom) ruled in favor of Minkow’s SLAPP suit — for making the identical set of claims that FitzPatrick has made against Medifast!

Minkow hired FitzPatrick to write a report that focuses on the similarities between Medifast and Bernie Madoff’s Ponzi scheme. In that same report Minkow asserted that some of Medifast’s products had excessively high levels of lead in them and “were in clear violation of California’s Proposition 65”. The analysis was conducted by product liability attorney Christopher Grell, who also claimed to have found excessive levels of lead in the products of Minkow targets Herbalife, Usana and Nu Skin.[4] It was always curious how Minkow and Grell only found high levels of lead in publicly traded MLM companies that Minkow had a short position in. Mr. Grell also represented Robert FitzPatrick in defense of Medifast’s lawsuit against him.

So, besides the fact Minkow declared Medifast is violation of California’s Prop 65, he also claimed Medifast’s TSFL division was, like Usana, and just as FitzPatrick had claimed, an “endless chain scheme” in violation of California Penal Code 327:

Although Minkow does blunder by referring to California’s “endless chain” code “373”, we can be fairly certain he actually meant code 327. Code 373 is California’s “Noisy Neighbor” law. Of all the things Minkow accused Medifast of, being too loud was not one of them.

“For Medifast Inc. to defend endless chain pyramid allegations by stating its proud affiliation with the Direct Sellers Association would be the moral equivalent of Bernie Madoff saying that he attended the Charles Ponzi School of Investment Advisors.”

                       — Barry Minkow

So it’s confusing that Medifast’s libel suit against FitzPatrick is allowed to go forward because his comments were “libelous per se because they accuse Medifast of a crime”, but all of Minkow’s direct and specific accusations of criminal activity is declared protected free speech. And get this… Within the Order granting Minkow’s and Coenen’s SLAPP motion[5] and dismissing them from the libel suit the court recognized:

“That these statements are couched in language like ‘in my view’ does not affect the Court’s analysis… Statements in the publications do not attain constitutional protection simply because they are sprinkled with words to the effect that something does or does not ‘appear’ to be thus and so; or because they are framed as being ‘in our opinion’ or as a matter of ‘concern.'”.

Now I’m completely confused.

The part of FitzPatrick’s SLAPP motion that was upheld involved his alleged libel of Medifast chairman and TSFL founder Bradley MacDonald. This gets even more bizarre. According to the court’s decision, “none of Defendants’ statements can be reasonably interpreted as referring to MacDonald.” One of the defendants was an anonymous message board critic called “zeeyourself”. However, it was the comment from another far more active and uglier poster “medisdead” who said “Pimp-Daddy-Brad McDonald [sic] is a disgrace to our Armed Forces for running a Madoff Ponzi Scheme and ripping off good people”, which was cited within the court’s decision. However, the judge went on to say “To conclude that the authors of these postings read Defendants’ statements and understood them as referring to MacDonald would be pure speculation.” I see. So, they might have been referring to another Bradley MacDonald? The fact that all of the 78 negative posts made by the above two trolls all occurred after Minkow’s and Coenen’s attacks began is just a coincidence? When “zeeyourself” posted, “Barry Minkow and Brad MacDonald are cut from the same cloth, they are National Directors of scam. Bernie Madoff is the sole Presidential Director”[6], what did the judge believe here? That the poster wasn’t aware of Minkow’s anti-Medifast propaganda and just randomly picked his name out of thin air?

It’s also interesting to note that Minkow solicited a supportive comment from anti-MLM attorney Douglass Brooks to “bolster the charge that Medifast is in violation” of Penal Code 327. Brooks is also a Pyramid Scheme Alert board member and best known for representing the plaintiffs in the infamous Webster v. Omnitrition case. In an email to FitzPatrick[7] Minkow describes Brooks response as “less than enthusiastic”, and no supportive comment was ever provided. Kudos to Mr. Brooks. At least one anti-MLM critic’s opinion can’t be bought.

Robert FitzPatrick, who is often cited in media reports as a “multilevel marketing expert” and who testifies as such in legal matters, claimed during his deposition:

1) He has never spent one day as an M.L.M. distributor;

2) There is “no fundamental difference” between a Ponzi scheme and a pyramid scheme;[8]

3) When asked about his negative Usana report that Barry Minkow paid him to produce he responded, “I never regarded it as negative.”;

4) He spent “200-250” hours researching his negative Medifast report, but never contacted Medifast corporate to have them address any of his concerns, only spoke to “two or three” Medifast distributors, could not recall anything from all but one conversation, took no notes of any conversation, only asked about costs associated with building a Medifast business, never inquired as to the rep’s income, and was told by the one rep he could recall speaking to that building an Medifast business was “a lot of hard work”;

5) Thought is was a “red flag” that Medifast’s stock had increased from $2.50 per share to $32.50 between December of 2008 and 2009[9];

6) He did not consider Medifast an “MLM company” until the sales from their “Take Shape for Life” division exceeded 50% of total company sales[10];

7) He believes there are only “300” M.L.M. companies operating (not based, but operating) in California;[11]

8) He still believes that Amway’s “70 Rule” means “that 70% of whatever they purchased each month had to be resold to people who were not also distributors.”[12]

Within Tracy Coenen’s self-congratulatory gloat post on her blog she declares: “While it may be true that Barry Minkow has engaged in some bad acts,” (may be true?), “I did not know about any of them and I did not participate in any of them. I was simply a consultant doing work for a client, and I stand behind the work I did.”

It’s funny how Coenen obligatorily and unconditionally parroted every one of Minkow’s accusations against Medifast, Usana, Herbalife, Pre-Paid Legal, and Lennar, often adding considerable amounts of her own commentary in support of Minkow’s claims.[13] But now that Minkow has been exposed as a fraud and is likely going back to prison, he was simply a “consulting client”. And how did Tracy — a certified fraud examiner and “forensic accountant” — miss all of Minkow’s fraudulent bash-n-cash schemes in spite of working directly with him on each and every one of them? In fact, she repeatedly accused Lennar of fraudulent, illegal activity based allegedly on her own analysis, besides routinely supporting and promoting Minkow’s anti-Lennar campaign. Yet, we now know that Minkow’s Lennar attacks were part of a fraudulent extortion plot and insider trading scheme. I knew what Minkow was up to four years ago from just outside observation. Coenen was on the inside working directly with him on these attacks and, allegedly, couldn’t figure out what was really going on.

Also within her victory post she writes: “While Barry may have lied to the court, fabricated documentation, destroyed evidence, concealed witnesses, and intentionally hid information,” (again, may have? It’s already been proven in a court of law that he did!), “I was not involved in any of those bad acts and did not know that they were occurring. I never engaged in any misconduct in any litigation, and I was not involved in the concealment or destruction of any evidence.”

According to the Court Order granting sanctions against Minkow in the Lennar case, not only did Minkow possess “numerous emails” with Coenen and others who assisted in his investigation that he hid from the court, Tracy Coenen is specifically identified as having “deleted emails about Lennar (she) had exchanged with Minkow.”[14]

So Tracy Coenen now claims she knew nothing about any of the deceptive, fraudulent or illegal activities being perpetrated by Barry Minkow. So, is she dishonest, or an incompetent fraud examiner? Keep in mind, I’m not saying she’s either. I’m just asking a question.

Tracy Coenen is a devout defender of Freedom of Speech and avidly supports hers and other blogger’s First Amendment right to post critical commentary online. Well, unless it’s about Tracy Coenen. If she keeps with her usual M-O she’ll now respond to this Alert by attacking me within her blog — because she knows I can’t respond there. You see, Tracy Coenen only allows comments to post that are either in support of her, or that offer criticisms she thinks she can successfully rebut. If you challenge her with criticisms she can’t defend she’ll simply delete your comment and ban you from posting anything else — which is exactly what she did with me. Apparently, freedom of speech only applies to Tracy Coenen’s criticism of you, not the other way around.

As for the Medifast libel suit against Minkow and Coenen, Medifast does have the option of appealing. Since the legal definition of libel seems to be a crap shoot, and the odds of crapping out twice in a row are very slim, they should certainly go for it. However, they’d have to appeal to the 9th Circuit — the same appeals court that ruled against Omnitrition in 1994. So once again, all bets are off.

Len Clements
Founder & CEO
MarketWave, Inc.

[1] Strategic Lawsuit Against Public Participation: Basically, a suit filed by a defendant in a slander or libel case that charges the plaintiff with trying to use the legal system to stifle public criticism.

[2] Although the primary stock manipulation charge was allowed to go forward.

[3] In his Feb. 20th 2007 letter to the FBI, SEC, and IRS, Minkow quotes attorney and Pyramid Scheme Alert board member Douglass Brooks as saying, “it appears that Usana has ‘contrive[d],’ ‘set-up,’ ‘propose[d] or operate[d]’ an endless chain within the meaning of Cal. Pen. Code Section 327”. (The SEC did subsequently investigate Usana on this charge and apparently found no reason to believe it was true — the investigation was closed with no action taken of any kind).

[4] Each company subsequently conducted their own tests and found no evidence to support Minkow’s and Grell’s accusation. Only the products supplied to Grell by Minkow appeared to have unsafe levels of lead in them.

[5] Footnote 11 on page 14.

[7] Medifast deposition, pages 264-265.

[8] In a Ponzi scheme the total amount due to be paid from each participant’s investment exceeds the investment, where as in a pyramid scheme the total amount due to be paid from each participant’s investment is less that the investment.

[9] Besides the obvious fact a rapidly rising share price is not, or at least should not, be a “red flag”, a “multilevel marketing expert” would have known that the direct sales industry is counter-cyclical with the economy and that public M.L.M. companies have been outperforming the overall market for most of the last ten years.

[10] There is no legal or historical precedent that defines an M.L.M. company in this way.

[11] The most conservative estimates place this number at 800, and most estimates run between 2,000 and 3,000.

[12] During an FTC action against Amway (1975-1979) the 70% Rule meant that at least 70% of a distributor’s previous purchases must have been sold to anyone — “at wholesale and/or retail”. Back then there was no multilevel compensation checks paid by the company, but rather it was routine that each distributor resell their inventory to the next person one generation below them, and a small profit is taken as the product is transferred down each generation. Within the court’s decision in the FTC v. Amway case these “wholesale” sales to other distributors are specifically recognized as counting towards the 70% Rule. Furthermore, the 70% Rule has long since been interpreted to mean 70% of a distributor’s purchases must have been “sold, sampled or consumed” before any more product can be purchased. This rule is designed to inhibit the front loading and stockpiling of unwanted product purchased solely to qualify in the compensation plan. See:

[13] Barry Minkow likewise reciprocated by providing a very positive review of Coenen’s book about accounting fraud where he ironically refers to her as the “ZZZZ Best fraud investigator”. ZZZZ Best was the name of Minkow’s fraudulent carpet cleaning business that resulted in his 7-plus year incarceration. Coenen has now removed Minkow’s testimonial from her website, but I just checked and it still appears at the top of page one of her book.

[14] Fact No. 11, page 6.

Anti-MLM Zealots – Part IV

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 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 ( 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

Anti-MLM Zealots – Part III

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 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!

Anti-MLM Zealots – Part II

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.