What do Bernie Madoff and multi-level marketing companies have in common?
Neither will make you rich.
Madoff landed a 150-year visit to jail because he ran the largest ponzi scheme in history. Ponzi or pyramid, such schemes are illegal in Canada and the U.S.
A pure pyramid scheme doesn't generate profit, but takes money from new "investors" (a.k.a. suckers) to pass on to those at the top levels of the pyramid.
Madoff siphoned billions of dollars from thousands of clients. In contrast, multi-level marketing companies (MLMs) are legal in North America, but some operate in a grey zone. Cast a very skeptical eye at anyone who tries to rope you into one.
Unlike ponzi schemes, MLMs sell products or services and can drive profits, even if some of these products are mediocre or fraudulent and the prices are outlandish. They commonly use direct marketing, now called relationship marketing, in which sellers approach you directly.
The most famous MLM is Amway, now Quixtar, a company selling cleaning and beauty products by direct marketing.
With armies of distributers, it is one of the largest companies in North America. Amway has been the target of many lawsuits in the U.S., and last year Harvard Business School accused it of running a pyramid scheme. In 1983, Amway pleaded guilty to criminal tax evasion and customs fraud in Canada and was fined $25 million. It also paid $56 million U.S. to settle a class-action suit alleging fraud and racketeering in California.
Usana, an MLM selling supplements, caught my eye with glossy brochures emphasizing the high salaries of "Diamond" sellers. Top levels have fancy names and are shown leading luxurious lifestyles.
The fine print in the back, however, shows the average income is only a few hundred dollars a year.
The brochures place all the emphasis on recruitment and income opportunities. Product is almost an afterthought. That's a red flag.
Another example is MonaVie, an MLM that markets fruit-based beverages and other "health products."
According to its own literature, the juice is sold by distributors on commission who build networks by recruiting new distributors.
They recently targeted UBC Okanagan students by putting on tastings in an attempt to recruit young people. I gave their acai juice a taste and found it dreadful.
The MonaVie website states that 50 per cent of sales go to commissions, another warning sign. Their claims of health benefits are not scientifically supported and, according to the USDA, their products do not contain the levels of nutrients that are advertised.
In 2010, a class-action suit was filed by Miller County Arkansas alleging that MonaVie used false and misleading advertising, engaged in civil conspiracy, fraud, negligence, unjust enrichment and violation of the Arkansas Deceptive Trade Practices Act.
If distributors are pressured to recruit new members and are paid to do so, they are probably caught in a pyramid scheme. This probability approaches certainty if you can buy product only by becoming a recruit and if portions of your earnings are kicked up to higher levels.
If you sign on as a recruit, then you enter at the level below your recruiter and have become part of their "downline."
People at the bottom don't make much money. Wisconsin tax records showed Amway distributors had an average net loss of $918 in 1979-80. This is partly because the lower levels cannot continue to grow exponentially. If each member is asked to recruit four people, then after 13 levels, the number of recruits required is greater than the global population, so you had better be in the top few levels.
The bottom levels "churn," which means the lowest recruits eventually accumulate a garage full of unsold product and simply quit. New members must be found constantly.
Recognizing a pyramid scheme can be tricky, but according to Canada's Competition Act, it is illegal if:
- There is compensation paid for recruiting a new salesperson.
- There is inventory loading, that is, the recruits must purchase an unreasonable quantity of product.
- Purchases are required as a condition of entry.
Other questions to ask are: Do more profits come from recruiting, videos and workshops on sales techniques than from product? Will the MLM buy back unsold product? Legitimate MLMs will do so, pyramid schemes will not. Are you required to purchase a minimum amount of product monthly to stay in the game?
If any of these questions are answered "yes," then squint very skeptically.
Skeptics also criticize MLM recruitment tactics, use of price fixing and high start-up costs. Distributors often feel exploited and some of the techniques used to engender loyalty border on the cultish. If anyone tries to pull you into of these companies you have to ask yourself: "Will I be an earner at the top or am I joining the lower levels reserved for suckers?"
Madoff whistle blower book:
National Anti-Fraud centre:
Blythe Nilson is an associate professor of biology at UBC Okanagan and advisory fellow of the Centre For Inquiry Okanagan.