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Documenting Deceptive Marketing in the MLM Industry and Reinforcing the FTC Mission of Consumer Protection

On January 4, 2018 the Federal Trade Commission (FTC) provided written guidance to the multilevel marketing (MLM) industry. This matters because: a) although the entire MLM industry (e.g., Amway, Nu Skin, Herbalife, LuLaRoe, Primerica, etc.) accounts for less than 1% of total US retail sales, the industry claims to involve approximately 8% of the US adult population and, b) the Direct Selling Association (DSA) and some industry leaders have tried to marshal Congressional support for legislation that contradicts established pyramid scheme case law. The FTC guidance, similar in tone to statements made by former FTC Chairman Ramirez, reinforces the case law and more than 40 years of FTC pyramid scheme prosecutions. If you know someone trying to understand if an MLM business “opportunity” is a pyramid scheme send them this press release containing the link to the guidance.

Coincidentally, the same day I published a piece in Seeking Alpha highlighting the important investigative research conducted by TINA.org regarding deceptive product and income claims among member firms of the DSA. The evidence is striking. Below I have re-posted that piece. Business done well is a thing of beauty. Business that uses deceptive marketing to attract participant $$ to an uncertain and unknowable path is not. Not for profits like TINA.org help regulators see the extent of the problem.

My SA piece is titled: The MLM Business Model: Maybe Lies Matter

The time has come for state and federal regulators to ask two important questions:

  1. Can the MLM business model succeed without deceptive marketing?
  2. What prosecutorial tools will protect consumers and investors from any company that profits from a network of agents they cannot or will not control?

Last year a TINA.org investigation documented pervasive illegal health claims made by MLM companies and distributors selling nutritional supplements. Data on members of the Direct Selling Association (DSA) was particularly telling. Of the 158 company members of the DSA in 2016, 62 (i.e., 39%) sold nutritional supplements. Of those, 60 (i.e., 97%) were found to “have distributors who are making (or have made) claims that their product can diagnose, treat, cure, prevent, alleviate the symptoms of, and/or reduce the risk of developing a multitude of diseases, which means they are making illegal disease-treatment claims.”

It isn’t just that approximately 38 percent of DSA companies had distributors making illegal claims, many well-known, long-established companies made the list (e.g., AdvoCare, Amway, Arbonne, Herbalife (NYSE:HLF), Melaleuca, Nu Skin (NYSE:NUS), Young Living, etc.).

That was a year ago. This year “TINA.org investigated every company on the November 29, 2017 Direct Selling Association membership list and found that more than 97 percent have made or are making – either directly or through their distributors – false and unsubstantiated income claims to promote the companies’ business opportunities.” Now we are not talking about a third of DSA member companies but, rather, nearly the entire DSA membership.

No need to list the offenders, just throw a dart at the DSA membership list. So much for DSA claims that “Consumers can be confident that DSA and its members will not tolerate unethical behavior, and the DSA Code backs up that assurance.”

Accusations of misrepresentations and misleading claims within the (MLM) industry date back at least 60 years. As a fun exercise, conduct a quick Internet search on a few of your favorite MLM companies using: “MLM company” + “misleading” or “deceptive.” While some links will lead to industry critics, other will show run-ins with regulators in the US and elsewhere.

For a more serious look try researching regional and nation newspaper archives. The prevalence of complaints over decades may surprise you. They may also surprise members of Congress and others who support the industry (here and here). Consistent with this history, nine months after TINA.org published data on illegal health claims half or more of the illegal claims were still publicly available.

Deception, lies, misrepresentations, and fabrications are certainly nothing new to investors who have long known that wealth can be transferred by misleading others, even if the deception is accepted for only a short period of time. In the case of the MLM industry, however, the more serious question is: To what extent is deceptive marketing vital in the business model?

From the DSA we read pronouncements about industry ethics. Yet, the previous cited TINA.org investigation showed that, over a five-year period, 15 of 27 companies receiving DSA awards had distributors making inappropriate health claims. Perhaps if DSA members would be less self-congratulatory and work more with regulators they would correct what appears to be a chronic failure of self-regulation.

Lying can work because most people are terrible at detecting a lie and some people are better liars than othersOne study showed subjects, “willing to lie to someone they know even over a small price discrepancy.” So much for the trust of affiliate marketing. Since big lies can cause big problems (e.g., Enron), legions of journalists, analysts, consultants, accountants, regulators conduct research to detect major lies that can impact a business, industry, or investors.

In some instances, a company or trade association will publically call out a firm misrepresenting its product or service, sometimes triggering regulator interest. In other cases, a non-profit like TINA.org highlights such mischief (e.g., Wal-Mart (NYSE:WMT)).

Then there is the MLM industry – a miniscule industry (less than 1% of US retail trade based on DSA data) that claims to engage as much as eight percent of the US adult population. Recently stung by a series of successful pyramid scheme prosecutions, industry members and the DSA enlisted Congressional friends to support legislation that negates 40 years of successful FTC prosecutions and associated case law.

Presented as pro-small business and pro-consumer the legislation would make legal endless-chain recruitment schemes regularly prosecuted as illegal pyramid schemes. Defense for the legislation ranges from 40-year-old views of direct selling that, ironically, the bill does not support, to the DSA redefining the traditional meaning of direct selling.

The accumulation of investigative reporting, class action cases (e.g., LulaRoeStream EnergyNu Skin, and Jeunesse), and the Herbalife Settlement bring continued scrutiny and fresh stories. Not without irony, it was Herbalife that pronounced an inability to control the marketing message of its distributors: “As a result, there can be no assurance that our distributors will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our distributor policies and procedures” (2011 Annual Report, p. 28).

The FTC Complaint certainly agreed. Similarly, in the TINA.org report on false and unsubstantiated income claims, the President of the DSA is shown on stage pronouncing (or pleading, not sure which) for industry representatives to more accurately describe what typically happens. Yet, year after year MLM companies repeatedly “disclose” distributor earnings in such a way as to make ascertaining the probability of success virtually impossible.

In 2018, we can expect the DSA and its political friends to try to deny virtually the entire history of successful MLM-style product-based pyramid scheme prosecutions. But will members of Congress get behind an industry repeatedly tagged with deceptive practices?

Happy New Year and let’s hope for a more honest 2018!

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