Why the FTC lets MLMs run wild in the US

Phaze SG

December, 2007

"If MLM is operating fraudulently, why doesn't the government do something about it?" readers and financial analysts often ask.

Exposés, complaints and lawsuits abound against MLM. The standard business practices of the multi-level marketing industry are in flagrant violation of FTC policies and three federal court rulings that define illegal pyramid sales schemes. A simple business model analysis reveals that the program is an income transfer, not a market-based sales program and that lack of retail sales guarantees a 99% loss rate among investors (salespeople).

An exposé on NBC Dateline (May 7, 2004) brought hidden cameras into Quixtar/Amway recruitment meetings to document deceptive claims and promises and to expose a multi-million dollar 'secret' business.

Yet most assume that MLM is generally a viable business.

One probable reason for this is the seven-year silence that has prevailed in law enforcement on multi-level marketing, giving the business a new aura of legitimacy.

Few people are aware of the powerful political influence of the MLM industry, which might provide this recent immunity. MLM's top priority is not just to curry favoritism and receive income at the public trough, but to literally protect its very existence. Only the tobacco industry has as much at stake in its political lobbying and its public marketing campaign.

Recently, the political influence of the Amway Corporation, the oldest, largest and most politically connected MLM, has gained notoriety.

-- It was revealed that Betsy Prince, sister of Erik Prince, the founder of the politically powerful military contracting firm of Blackwater (recently accused of crimes in Iraq and gaining immunity from law enforcement), is married to Dick DeVos, the son of the founder of Amway. The Prince/DeVos marriage, which links Blackwater and Amway, created what is being called the most politically influential family in the Republican Party. Erik Prince has been a steady contributor to the Republican National Committee, giving more than $200,000 since 1998. He also has supported various conservative candidates, including President Bush, Sens. Tom Coburn (R-OK) and Rick Santorum (R-PA), Rep. Duncan Hunter (R-CA), and indicted former House Majority Leader Tom DeLay (R-TX).

-- The above referenced wife of Dick Devos (sister of Erik Prince), Betsy DeVos, has served as chair of the Michigan Republican Party. In 2000 she won special status as a so-called "Pioneer" after raising $100,000 for the Bush/Cheney campaign.

-- In 2006, Dick DeVos ran unsuccessfully for the governorship of Michigan. Had he won, some analysts think he would have had a shot at running for President!

-- Amway founders and top guns have contributed millions to Republican congress members and to President Bush. This was rewarded in 2001 with Pres. Bush's appointment of Timothy Muris, an attorney that worked for Amway, as chairman of the FTC. Muris has since left the FTC and several key Amway protectors in Congress (e.g. Rich Santorum in PA and Tom Delay in TX) were defeated.

-- As FTC Chairman, Muris appointed David Scheffman as the FTC’s new Chief Economist. Prior to his appointment, during Clinton administration, David Scheffman testified against the FTC and on behalf of the MLM scheme, Equinox International (which was later shut down as part of a settlement). As an expert witness for the pyramid scam, Scheffman argued that the Equinox scheme was legitimate, not a pyramid scheme. His claim was largely based on the assertion that Equinox operated just like Amway. The FTC charged that Equinox was a pyramid scheme fraud.

-- According to the consumer watchdog group Common Cause, Amway and affiliated donors made soft money contributions to the Republican National Committee totaling $4,147,000 between January 1, 1991 and June 30, 1997

-- In 2000, Amway “soft money contributions to the Republican National Party totaled $1,138,500.

-- In 2004, the 527 “Progress for America” received money from Amway. “The latest crop of donors includes Amway founders Richard DeVos and Jay Van Andel, who each chipped in $2 million.” (Newsweek, “The Secret Money War,” September 20, 2004.)

-- In 1999, the inaugural fundraising event for the Republican Majority Issues Committee (RMIC ) was held aboard the DeVos family yacht. The RMIC, a "527" organization, was founded by Rep. Tom DeLay (R-Texas). The committee declared its intention to "identify, educate, and mobilize conservative voters in key House races." (http://www.motherjones.com/news/special_reports/mojo_400/12_devos.html)

-- Describing the events at the 2000 Republican Convention in Philadelphia, the New York Times wrote, “For the party’s top underwriters, there will be an array of gold-plated events in Philadelphia, including cocktails with Gen. Colin L. Powell and an evening cruise on the Delaware River aboard the ‘Enterprise,’ the yacht owned by Richard M. DeVos, the Amway founder.

-- At the 2004 Republican National Convention in New York insiders were feted aboard Dick and Betsy DeVos’ yacht, as well as Jay Van Andel’s lavish 169- footer.” (Kathleen Gray, Detroit Free Press, 9/2/04)

-- In a 1997 article, nationally syndicated columnist, Molly Ivins, reported that the budget package passed by Congress that year provided a tax break “worth $283 million to one corporation: Amway.”
Ivins noted, “The company and its top leaders have contributed at least $4 million to the Republican Party during the past four years, so that’s a $4 million investment in campaign contributions with a $283 million payoff for Amway.”
“The payoff for Amway was not in the original House or the Senate version of the tax bill,” she wrote. “House Speaker Newt Gingrich intervened at the last minute to help get the special tax break inserted in the bill.”
Describing this special tax break, Common Cause reported: “Buried in the 1997 budget and tax deal is Provision C, Section XI. The provision… reads: ‘Modification of passive foreign investment company provisions to eliminate overlap with subpart F and to allow market-to-market election, and to modify asset measurement rule.’ In other words... the provision primarily benefits Amway Corp. and could be worth millions of dollars to (Amway).”

Related News:

-- The largest and oldest of US-based MLMs, Amway, is on trial right now in England for operating as a deceptive fraud. The Times reported government findings that 71% of Amway’s UK sales people earned no commissions at all; of the 30% that earned some commission, 2/3rds of them earned on average just $27 (£13.53) a year. More…

-- A class action lawsuit has also been filed against Quixtar (Amway) by plaintiffs who are at the bottom of the Amway/Quixtar pyramid. These charges against Amway/Quixtar assert that there is no retail "direct selling" opportunity, only an endless chain recruitment program. The suit was brought by Boies, Schiller and Flexner.

-- Police officials in India raided offices of Amway in the largest state in the South of India. The police are charging that Amway is deceiving Indian citizens and causing large-scale financial losses by perpetrating a pyramid scheme.

-- China, the largest market in the world, has effectively shut Amway out of that country. The government of China allowed Amway to gain a licence but strictly prohibited Amway from using its pyramid recruitment pay plan. No Amway distributor can earn money from purchases of others in a downline. Without the false lure of the endless chain, Amway's sales will wither in China.