In the Wake of Herbalife Controversy, Consumer Advocates Deliver

FOR IMMEDIATE RELEASE --
In the Wake of Herbalife Controversy, Consumer Advocates Deliver White
Paper on Pyramid Selling Schemes to Senator Markey
Washington, D.C. –
Two attorneys and an expert on pyramid schemes have delivered a white paper to Senator Ed
Markey (D.Mass.) concerning the need for more effective regulation of the multi-level marketing (MLM)
industry. The paper was drafted by Attorney Douglas M. Brooks, author and pyramid scheme expert
Robert L. Fitzpatrick and former Wisconsin Assistant Attorney General Bruce Craig.
Earlier this year Senator Markey sent letters to the Federal Trade Commission (FTC) and the
Securities and Exchange Commission (SEC), requesting that they investigate Herbalife, one of the largest
MLM firms. On Wednesday, Herbalife announced that it had received a Civil Investigative Demand
from the FTC.
The paper analyzes the confusing and contradictory data which has been released by Herbalife
and two other large MLM firms, Amway and Nu Skin. The paper demonstrates that of the MLM
distributors who are seeking a business opportunity (excluding those who may arguably have joined just
to purchase products), approximately 99% are losing money and most eventually drop out. Meanwhile,
approximately 54% of all commissions paid by these MLM firms go to the top 1% of distributors, with
that top 1% earning a mean average income of about $128,000. Given the scale of pyramid selling
schemes operating in America today – Amway, Nu Skin and Herbalife alone had 1.4 million households
under contract who invested $2.259 billion in their “income opportunities in 2012 – there is a compelling
need to address the significant negative impact on communities and households.
Based on the tremendous loss rates experienced by MLM distributors, the paper concludes that
current FTC policy concerning MLM, which is based primarily on a 1979 case involving Amway, is a
failure. The so-called “Amway rules,” which have been adopted by most MLM firms, do not effectively
ensure that the companies offer a legitimate retail selling opportunity or that compensation to MLM
participants is based primarily on retail sales; most important, the so-called Amway rules have not
prevented the substantial losses incurred by 99% of MLM participants.
The paper argues that the FTC should address MLM programs under an earlier approach
developed in a 1975 case involving an MLM firm known as Koscot Interplanetary. The Koscot decision
permits MLM firms to operate only if their compensation plan does not require any purchase to
participate and does not allow the payment of compensation on any basis other than on “actually
consummated” retail sales. The return to the Koscot standard would enable the FTC to prevent pyramid
schemes from forming and to effectively regulate all existing multi-level marketing companies with a
consistent and readily enforceable standard. It would ensure that MLM companies are true direct selling
enterprises and do not operate as predatory recruiting frauds.
The white paper is available at http://pyramidschemealert.org/wordpress/wpcontent/uploads/2014/03/The-Pyramid-Scheme-Industry-FINAL.pdf
The three authors are members of an international coalition of consumer activists, internet
bloggers, entrepreneurs and professionals which, in October of 2013, filed a petition requesting that the
Federal Trade Commission investigate the multi-level marketing industry and protect consumers from
fraudulent and deceptive practices. The coalition’s Petition to the FTC is available at
http://mlmpetition.com/ and http://pyramidschemealert.org/international-coalition-of-consumeradvocates/
Contact:
Douglas M. Brooks
(781) 424-6737
[email protected]

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