For enforcement agencies, consumer educators, journalists, and researchers

When Should an MLM or NetworkMarketing* Program Be Considered

an Illegal Pyramid Scheme?

•• History, effects, and defining characteristics of product-based pyramidschemes.

•• Tools for identifying the most harmful of new product-based pyramidschemes as targets for proactive enforcement

•• Recommendations for enforcement of laws and rules protectingconsumers against product-based pyramid schemes—and suggestions forimproved laws and rules

•• Unmet challenge to network marketing (MLM) industry leaders

•• Consumer awareness guidelines for distribution to consumers

By Jon M. Taylor, Ph.D.Consumer Awareness Institute

*a.k.a. Multi-level Marketing, Consumer Direct Marketing, Chain DistributionScheme, (Multi-level) Purchasing Plan, Gifting Network, etc.

© 2000 by Jon M. Taylor, P.O. Box 488, Kaysville, UT 84037Web site: whatisgood.com /nwm E-mail: jonmtaylor@juno.com

TABLE OF CONTENTS

Report Abstract 3

Acknowledgements 4

Definitions of Relevant Terms 4

The History of Pyramid Schemes and Multi-level (or Network) Marketing (MLM) 5

Destructive Effects on the Lives of MLM Participants 7

How this Research Came about 7

Challenge to the Industry: “Prove Me Wrong.” 8

Naked Pyramid Scheme vs. Product-Based Pyramid Scheme (PPS) 9

Types of MLM Compensation Systems 10

Defining Characteristics of Product-Based Pyramid Schemes (PPS) 10

PPS DEFINING CHARACTERISTIC #1: A chaining hierarchy of levels of distributors— 10more than is functionally justified—is recruited without area limits, which leads toextreme leverage and perceived saturation in the marketplace.

PPS DEFINING CHARACTERISTIC #2: Relative vertical equality (RVE) in compensation 11leads to an emphasis on recruiting and extreme horizontal inequality (EHI) over the entirenetwork of distributors.

Table 1: “Which distributors get the money paid out by one highly leveraged MLM?” 13

PPS DEFINING CHARACTERISTIC #3: Significant purchase or recruiting quotas are 14required (or incentives offered) to qualify for increasing bonus levels or purchasing discountsin an ascending hierarchy of payout levels—the “pay to play” feature.

The Key Problem with the FTC Definition of a Multi-level Marketing Program 14

NEEDED: A More Proactive Approach to Enforcement of Laws Against Pyramid Schemes 16as Applied to PPS’s

Syndrome Analysis—A Tool For Corroborating The Existence Of A Pyramid Scheme 16

Symptoms of a Product-Based Pyramid Scheme (PPS) Syndrome 17

Characteristics of More Acceptable Non-PPS Marketing Organizations 22

How to Develop a Pyramid Scheme that Is Very Profitable for the Founders— 24and Get Away with It

Front End or Middle Weighted Systems—More Equitable? 25

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TABLE OF CONTENTS, continued

Conclusions 26

Recommendations 27

Final Comment 28

Notes 28

Appendix A: My Unique Background and Experience with Network Marketing (MLM) 29

Appendix B: Unmet Challenge to Network Marketing (MLM) Industry Leaders: 31“Network Marketing Payout Distribution Study”

Appendix C: Twelve Tests for Evaluating a Network Marketing (MLM) “Opportunity” 37

Appendix D: Web Sites that Offer a Critical View of MLM/Network Marketing 40

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REPORT ABSTRACT

One of the most problematical of business models ismulti-level or network marketing (MLM ). Many MLMprograms show all the effects and characteristics of apyramid scheme, but the MLM industry has nonethelessbeen allowed to continue and flourish. Though consideredbenign by many, its insidious and corrupting influenceand the financial and social harm suffered by participantsis considerable. Unfortunately, victims of these programsseldom complain, blaming themselves for their failures.

This problem is compounded by limited resourcesavailable to enforcement agencies, faced with a profusionof both naked pyramid schemes (wherein no products areoffered) and product-based pyramid schemes (PPS’s),operating as MLM’s. They are now appearing by thehundreds on the internet, and established MLMcompanies are expanding into overseas markets.

Due to inadequate definitions of what constitutes apyramid scheme, insufficient resources, and/or lack ofprosecutorial will in enforcement of existing statutes,enforcement agencies often wind up catching theminnows, but letting the sharks go free. The consequencesare enormous—millions of consumers are being bilkedout of billions of dollars each year.A1

A pyramid scheme, as currently defined by the FTC(and similarly in many state laws), are plans which (1)“concentrate on the commissions you could earn just forrecruiting new distributors” and which (2) “generallyignore the marketing and selling of products andservices.”A2

The above two criteria have proven to be inadequatefor determining whether or not any given MLM programis a pyramid scheme. Interpretations based on qualifiedmathematical analyses of compensation systems couldyield a wider application of the laws against pyramidschemes to PPS’s. They would also allow for moreproactive enforcement.

The key to predicting potential harm to victims of aPPS is to determine the degree of leverage of thecompensation system. Once a highly leveraged PPS isidentified by its compensation system, the prognosis iscertain: inordinate emphasis on recruiting will follow,and only a few at the top of the pyramid will profit at theexpense of the investments in product purchases by thosein their downline—most of whom lose money. In otherwords, emphasis on recruiting is just one of the effects,not the cause, of the problems with PPS’s.

Problems with interpreting the FTC definition of apyramid scheme has been compounded by informationreleases from the FTC, state agencies, and the BetterBusiness Bureau (BBB), in which MLM’s are not onlydistinguished from pyramid schemes, but are exoneratedas non-pyramids, when in fact they may be PPS’s andactually more pyramidal in their effects over time thannaked pyramid schemes.

Based on the FTC’s definition of multi-levelmarketing, it is assumed that implementation of “rules”will keep MLM’s out of the category of pyramid schemes.Such rules are ineffective unless they incorporatefundamental changes in the MLM compensation system sothat it provides significantly greater rewards for retailingthan for recruiting—in actual payout from the company,since MLM prices are generally too high for retailmarkup to non-distributors.

This paper provides legislators, enforcementagencies, educators, and others with three distinguishingcharacteristics that can be used as tools to determineproactively whether or not any given MLM program willlead to the harmful effects of a highly leveraged product-based pyramid scheme (PPS):

1. A chaining hierarchy of levels of distributors—more than is functionally justified—is recruited withoutarea limits, which leads to extreme leverage andperceived saturation in the marketplace.

2. RVE-EHI. Relative vertical equality (RVE) incompensation systems leads to extreme horizontalinequality (EHI) in payout over the entire network ofdistributors—huge payouts to a tiny percentage ofparticipants, while the vast majority wind up losing themoney and effort they invested over a period of time.

3. Significant purchase or recruiting quotas arerequired (or incentives offered) to qualify for increasingbonus levels or purchasing discounts in an ascendinghierarchy of payout levels (the “pay to play” feature).

Syndrome analysis, in which any program can beevaluated based on a set of pyramidal characteristics, canserve to corroborate the existence of a PPS.

Legislators, courts, and consumer protectionagencies would serve consumers better if they improvedtheir methods of determining whether or not an MLMbusiness fits the definition of a pyramid scheme—or at thevery least were more cautious in implying that an MLMprogram is not a pyramid scheme, when in fact it is morelikely a PPS that has managed to escape correctiveaction. Genuinely helpful information should be suppliedto consumers. (See Appendix C for a rigorous set ofguidelines.)

It would be helpful if MLM companies were requiredin their recruiting to disclose average total payout fromthe company less purchases from the company bypercentiles of distributors. The percentage of alldistributors (past and present) who have achieved eachpayout level should also be disclosed. This would revealextreme payout patterns typical of pyramid schemes.

The concepts and analytical framework for thispaper are based on first-hand experience, a broadbackground in marketing and entrepreneurship,education and experience as a business analyst andbehavioral researcher, extensive interviews withdistributors from a variety of MLM programs, and asynthesis of the thinking of the best experts in the field.

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The MLM industry has been challenged to refutemany of the basic concepts for this report, but has so farresponded with silence.

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ACKNOWLEDGEMENTS

Some of the top experts on MLM’s and pyramidschemes have been consulted in preparation of this paper.

Kristine Lanning of the Office of ConsumerProtection, Department of Justice, State of NorthCarolina, provided a clear picture of the legislative andregulatory framework within which enforcement officialshave to operate in dealing with MLM’s.

Bruce Craig, formerly an Assistant Attorney Generalfor the State of Wisconsin for 30 years and who litigatednumerous pyramid schemes, also helped in understandingwith the realities of what can be accomplished. Hispetition to the FTC regarding Amway’s compliance withthe “Amway rules” is revealing.

The case prepared by the FTC’s Peter Vandernetagainst Equinox was encouraging in demonstrating thatpowerful arguments can be put forth against an MLM thatis in reality a pyramid scheme.

Douglas M. Brooks of Gilman and Pastor, of BostonMassachusetts, attorney representing NuSkin distributorsin Canada who have been pursuing a class action againstNuSkin International, Inc., for seven years, helped incomparing the unlimited recruiting of MLM’s toterritorial controls important to franchises. He was alsohelpful in arguing against pyramid schemes masqueradingas MLM’s, deceptive sales practices, and related problemsof MLM’s.

Robert Fitzpatrick, author of False Profits, helped inrefining concepts and content and in forming anorganization—Pyramid Scheme Alert—to bring togetherthe best resources for combating the growth of all types ofpyramid schemes, including most MLM’s.

Ruth Carter, author of Behind the Smoke andMirrors, provided valuable contacts and web resourcesthrough her popular and extremely valuable web site—mlmsurvivor.com.

Dean VanDruff, author of the very popular articles“What’s Wrong with Multi-level Marketing?” and“Frequently Asked Questions” on his web site(vandruff.com) provided conceptual input. Other valuableweb sites are referenced in Appendix D.

My one-year test as a distributor for a popular MLMprogram, was vital in grasping the concept, motivation,dynamics, and effects of MLM’s that were in realityproduct-based pyramid schemes. Top level distributors inthis program provided valuable input.

In mentioning personal experience with MLM, theresome who will say this is just a sour grapes response to my“failure.” Let me respond by asserting that I was not afailure, but could see after a year that being in the top 1%was not profitable. One would have to be in the top 1/10of 1% to begin to earn a significant profit—and then onlyat the expense of deceiving hundreds, even thousands ofvictims (each of whom would lose money) to get there. Ilater learned that this was true for many MLM programs.

Others will say, “No wonder you had a badexperience. You should have tried this MLM instead.”But I sought input from hundreds of actual distributorsand ex-distributors from a wide variety of MLMprograms, using a variety of compensation systems.Industry representatives and authors I consulted, such asRichard Poe (Wave 3: The New Era in NetworkMarketing) and Leonard Clements (Inside NetworkMarketing), helped me to understand their viewpoints aswell. I believe my analysis and conclusions are both fairand accurate.

DEFINITIONS OF RELEVANT TERMS

What’s in a definition? Plenty—even billions ofdollars—as this paper will demonstrate. In order to leadthe reader through difficult and subtle issues related tomulti-level marketing (MLM or “network marketing”),some definitions are necessary—some from a standarddictionary, others unique to this analysis.

Multi-level marketing program (MLM for short, laterreferred to as “network marketing” or MLM), as definedby the FTC—

any marketing program in which participants paymoney to the program promoter in return for which theparticipants obtain the right to (1) recruit additionalparticipants, or to have additional participants placed bythe promoter or any other person into the programparticipant’s downline, tree, cooperative, income center, orother similar program grouping; (2) sell goods or services;and (3) receive payment or other compensation; providedthat: (a) the payments received by each programparticipant are derived primarily from retail sales of goodsor services, and not from recruiting additional participantsnor having additional participants placed into the programparticipant’s downline, tree, cooperative, income center, orother similar program grouping, and (b) the marketingprogram has instituted and enforces rules to ensure that itis not a plan in which participants earn profits primarily bythe recruiting of additional participants rather than retailsales.1

Pyramid scheme (as currently defined by the FTC and insome state legislation)—plans which “concentrate on thecommissions you could earn just for recruiting newdistributors” and which “generally ignore the marketingand selling of products and services.2

An example of definitions used by state regulators isthe following:

“Pyramid scheme” means any sales device or plan underwhich a person gives consideration to another person inexchange for compensation or the right to receivecompensation which is derived primarily from theintroduction of other persons into the sales device or planrather than from the sale of goods, services, or otherproperty.3

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Network marketing—a term devised my MLMcompanies to get around the implications of “multi-levelmarketing”—which sounds too much like a chaindistribution or pyramid form of marketing.

Naked pyramid scheme refers to a blatant pyramidscheme that is easy to detect because no products areoffered, merely a participation fee or “investment.” Chainletters work on the same principle. A continuous chain of“participants” or “investors” is recruited, in which eachpays a fee to participate and receives money by recruitingothers into the system.

A product-based pyramid scheme (PPS) is a pyramidscheme that in most respects resembles a naked pyramidscheme, except that products are purchased bydistributors, primarily for resale (supposedly). Suchproduct purchases, often combined with other incentives,qualifies distributors for commissions in ascending levelsin the distributor hierarchy.

Relative vertical equality (RVE) in compensation—acharacteristic common to both illegal pyramid schemesand most MLM programs, in which distributors farremoved from consumers (the upline) receive as much ormore total remuneration per sale from the company asdoes the distributor who actually sells the product to theconsumer. The reward system creates greater incentive torecruit a downline of distributors than to sell products.

Extreme horizontal inequality (EHI) in payout todistributors—a characteristic common to both illegalpyramid schemes and most MLM programs, in whichextreme inequality is created across the entire network ofdistributors, with relatively few distributors at the top ofone or more pyramidal hierarchies receiving very largepayouts from the MLM company, as opposed to the vastmajority of distributors who receive little or no payout(usually losing money after expenses). In effect, the lossesof the many finance the opulence of the few.

Back end weighted system—a MLM compensationsystem in which company remuneration is meager tofront-line distributors (who actually sell the products toconsumers) but generous to upline distributors with verylarge downlines, to the point that disproportionateincomes can be made by a handful of upline distributorson the “back end” of the compensation system. A strongRVE-EHI or pyramidal emphasis is seen in back endweighted systems.

Front end weighted system—a compensation system inwhich company remuneration to distributors is generousfor front end (front-line) distributors who actually sell theproducts to consumers, but which does not allow huge anddisproportionate fortunes to be made by upline

distributors. Deception and appeals to greed areminimized.

Middle weighted system—a system in which the payoutper sale is larger for those distributors two to four levelsup in the hierarchy than either for front line distributorsor for those further upline.

Pyramidal—“of or like a pyramid”4

Downline—all of the MLM distributors who are recruitedunder a given distributor and from whom are generatedoverrides on product sales.

Upline—the direct line of distributors who are above agiven distributor in the MLM distributor hierarchy orpyramid scheme and who receive overrides from his/hersales or purchases.

Scheme—“a plan or program of action, especially a craftyor secret one; . . . a systematic or organized framework; . .. design.”5

Syndrome—“a group of signs and symptoms that occurtogether and characterize a particular abnormality” and“a set of concurrent things (as emotions or actions) thatusually form an identifiable pattern”6

THE HISTORY OF PYRAMID SCHEMES ANDMULTI-LEVEL (OR NETWORK)MARKETING (MLM)

The history of pyramid schemes in this country isfascinating, but I will include merely a brief sketch here.When Charles Ponzi organized the Securities ExchangeCompany in Boston in 1919 and issued promissory notespayable in 90 days with 50 percent interest, he kicked offa storm of investment frenzy which duped just abouteveryone, including politicians, law enforcement officers,and reporters. He tricked speculators by using the moneyof new investors to pay old investors huge ‘profits.’

Ponzi took in over $15 million from this and otherschemes before his house of cards collapsed, causinglosses for thousands and leading to jail time and hiseventual deportation to Italy in 1934. Incidentally, therewere similar schemes prior to Ponzi (for example, JohnLaw’s “Mississippi Bubble” scheme in France in 1719and William Franklin Miller’s Franklin Syndicate in1899—a.k.a. “520 percent Miller”), but the Ponzi namestuck for this type of phenomena.

Some consider Ponzi schemes as separate anddistinct from pyramid schemes, but as one writerobserved,

Ponzi and pyramid schemes do have similarities.Both are fraudulent arrangements for the receipt and

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redistribution of money with early participants winningand those who enter later losing. In each case it isessential to continue the game with new infusions ofmoney, for if the play ends and there is an accounting,there must be a deficit and cries of pain. But where Ponzipromised a definite return on one’s investment—albeit ahuge one—the possibilities in a pyramid were almostlimitless as new subscribers feed those who joined before.

Furthermore, the machinery of the pyramid is alwaysexplained and is, in fact, one of its alluring features,whereas Ponzi plans invariably refer obscurely to exoticinvestments that are really irrelevant and usuallynonexistent. In some cases the pyramid seems almostacceptable socially, as in the cases of chain letters ordistributorship plans, but there has never been anyquestion about the vice of Ponzi schemes.”7

Later came chain letters, beginning with the “send-a-dime” letter widely appearing in Denver in 1935, whichbore the heading “Prosperity Club” and the slogan “InGod We Trust” This led to the $1 chain letter in Omaha,chain letter agencies or “factories, and the “Circle ofGold” which spread from California throughout thecountry in the late 1970’s—all of which used the postalsystem.

Many of these chain letters went undergroundbecause of aggressive enforcement of federal mail fraudstatutes. Still other variations, such as chart and airplanegames, emerged later.

“Chain selling” or “chain distribution” systems, thebasis of multi-level marketing, was an eventual offshootfrom chain letters. With chain selling, the selling ofproducts was made through multiple levels of distributors,each of whom received some type of compensation for thesales of those recruited at lower levels, or one’s“downline.”

In 1967 Glenn W. Turner began an incredibledistribution scheme in Orlando, Florida.

His line purported to be cosmetics, featuring minkoil as a special ingredient, but in reality he solddistributorships. A participant paid a fee and became adistributor, entitling him to sell the cosmetic products, butmore important, entitling him to sell otherdistributorships. Little selling of the cosmetics actuallytook place, for the real money was to be made in the saleof distributorships. Those transactions were essentially thesame as in the chain letter, or the airplane or chart games,in that the new participant paid one fee to the party whobrought him in, another to the party at the top, and thenassumed a position at the bottom of the pyramid.

Over five years, Turner “parlayed $10,000 . . . into aconglomerate that generated a cash flow of $200 million,and in which as many as 100,000 people may haveinvested. . . .Two main business organizations weredeveloped to carry out his activities: Koscot (‘KosmeticsCompany of Tomorrow’) Interplanetary, Inc., the salesarm, and Dare to Be Great, Inc., the training body.”8

I cannot leave the Turner case without quoting thefollowing, which sounds like many typical MLMopportunity meetings today:

Would-be [Dare to Be Great] participants werebrought to staged gatherings in places like hotel ballroomswhere clean-cut young men, each with a rhinestone pin ofa flag . . . attached to his lapel, subjected them to therigors of high-pressure salesmanship. . .” Thesegatherings, called “Adventure Meetings” or “GoldenOpportunity Meetings,” were described by one judge asbeing like an old-time revival meeting but directed towardthe joys of making easy money rather than salvation. Theirpurpose is to convince prospective purchasers, or‘prospects,’ that Dare is a sure route to great riches.

At the meetings are employees, officers, andspeakers from Dare, as well as purchasers (now‘salesmen’) and their prospects. The Dare people, not thepurchaser-‘salesmen,’ run the meetings and do the selling.They exude great enthusiasm, cheering and chanting; thereis exuberant handshaking . . . The Dare people dress inexpensive, modern clothes. . . . they drive new andexpensive automobiles, which are conspicuously parked inlarge numbers outside the meeting place.

Dare speakers describe, usually in a frenziedmanner, the wealth that awaits the prospects if they willpurchase one of the plans. Films are shown usuallyinvolving the ‘rags-to-riches’ story of Dare founder GlennW. Turner. The goal of all of this is to persuade theprospect to purchase a plan . . . and thus grow wealthy aspart of the Dare organization.9

It is against this backdrop that we will look at theillegality of pyramid schemes and how they are oftendistinguished from “legitimate” MLM programs.

The FTC has described the essential features of anillegal pyramid scheme as follows:

Such schemes are characterized by the payment byparticipants of money to the company in return for whichthey receive (1) the right to sell a product and (2) the rightto receive in return for recruiting other participants intothe program rewards which are unrelated to sale of theproduct to ultimate users. . . As is apparent, the presenceof this second element, recruitment with rewards unrelatedto product sales, is nothing more than an elaborate chainletter device in which individuals who pay a valuableconsideration with the expectation of recouping it to somedegree via recruitment are bound to be disappointed.10

It appears that pyramid schemes are consideredillegal when legitimate products are subordinated to theemphasis on sales rights and overrides from recruiting anetwork of participants, quite unrelated to sales ofproducts themselves. Such programs lead to inflated andunrealistic promises and inevitable market saturation. Sopyramid schemes allow a few opportunists to takeadvantage of the ignorance and vulnerability of anunwitting populace—who fail to see that mathematicallyonly a few can succeed at the expense of failure and lossesof the masses recruited into any given program.

But there is a business model that is at least aspyramidal and powerful as any illegal pyramid

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scheme—and in my opinion more pernicious because ofits more pervasive effects. It is a phenomenon that hasfor the most part escaped recognition as a pyramidscheme because legitimate products are offered and themoney required for entry into the system is nominal,usually less than $100 for a kit of sales materials andsamples. Yet it costs consumers billions of dollars everyyearA1 —dwarfing illegal pyramid schemes to a merespeck in comparison. The business phenomenon ofwhich I speak is multi-level marketing (MLM), morerecently referred to as network marketing (NWM).

One problem with using a generic term exclusively isthat new schemes are being generated by the hundreds,many claiming to have solved the problems of MLM’s.“Network marketing,” for example, was a term coined toget around the onerous sound of “multi-level”marketing—which almost implied a pyramid scheme. Butfor now I will use the generally accepted “MLM”acronym.

According to an FTC release on May 23, 1979,Amway—one of the earliest MLM companies—wasordered by the FTC “to stop fixing retail and wholesaleprices and misrepresenting the profitability of Amwaydistributorships.” Since that time Amway Corporation (asa company) has been more careful about making inflatedpromises to prospects. However, on a far more importantissue, Amway and—by extension—an emerging industrytriumphed. The complaint that Amway’s sales plan wasan illegal pyramid scheme was dismissed by theCommission—a major coup for Amway and for allMLM companies that followed.

It is this latter point that has given credence toMLM and led to enormous growth in an industry thatin the past decade has cost consumers tens of billions ofdollars and left tens of millions of participants holdingthe bag of broken promises—and in many cases—broken lives.

To be fair to responsible enforcement agenciesand to those who draft laws relating to pyramidschemes, it is extremely difficult to define what is andwhat is not a pyramid scheme. MLM, for example, iscontinually reinventing itself in new versions and complexcompensation systems—partly to get around legislationagainst pyramid schemes. So it is not surprising that asimple definition of what constituted a pyramid schemewas adopted. How that definition is applied, however, isopen to interpretation.

Consumers continue to be provided with misleadinginformation (regarding what constitutes a pyramidscheme) from government agencies and from the BetterBusiness Bureau. Sources favorable to MLM, such as theDirect Selling Association (using the “Direct SellingEducation Foundation” as a front), MLM industry sources(such as Upline), and business and “opportunity”publications (such as Success magazine) then expandupon and perpetuate these misconceptions.

DESTRUCTIVE EFFECTS ON THE LIVES OFMLM PARTICIPANTS

The effects on the lives of participants is welldescribed by Robert Fitzpatrick in excerpts from theweb site of Pyramid Scheme Alert (Appendix D):

In recent decades, pyramid schemes have become aninsidious, pervasive and corrupting influence in themarketplace and community, causing financial and socialharm on a global scale.

Since 1980 a new form of sales and marketing,called multi-level marketing or network marketing, hasspread worldwide and spawned an explosion of pyramidsales schemes involving tens of millions of consumers.The line between legal forms of network marketing andfraudulent pyramid programs is a point of controversy,confusion and inquiry in many countries.

MLM Pyramid Schemes:• The largest and most widespread of the pyramid

schemes are those that disguise themselves as"Multi-level Marketing" (MLM) businesses.

• These schemes cause the greatest harm, affectthe most people, and steal the largest amount ofmoney.

• They can involve millions of people, swindlebillions of dollars.

• Because they mask themselves as "sales anddistribution businesses" they unfairly competewith legitimate business

• Because MLM pyramid schemes require highlevels of recruiting, they entice people to defraudtheir own families and friends. Consequently,the social harm can be as greater or even greaterthan the financial damage.

• Because MLM pyramid schemes masquerade as"independent business" they play upon anddistort important values such as independence,initiative, entrepreneurship, and personalfreedom.

• Because MLM pyramid schemes make promisesof extraordinary wealth to the participants,people can be induced to spend all theirearnings, lose or quit their existing jobs, neglecttheir families and other relationships and take ongreat debt in the pursuit of the elusive "dream"they have been deceptively sold.

• MLM pyramids operate as private "networks"outside the mainstream of business and normalsocial life. They are strictly hierarchical withuplines, downlines and charismatic "leaders."

• They require loyalty and large commitments oftime, and they persuade participants to avoidanyone ("negative") who questions or critiquesMLM. Consequently, MLM pyramid schemescan gain the power of a cult over people’s lives.

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HOW THIS RESEARCH CAME ABOUT

As a long-time critic of MLM programs, I wascurious to know why so many otherwise intelligent andcapable persons were involved. The growth of MLMamazed me, since it seemed obvious it was just a disguisedpyramid scheme. Yet several persons whom I trusted andrespected tried to recruit me into their downline. Theyconvinced me that I may have misjudged the industry andthat MLM may have a real future as a viable and ethicalbusiness model. By closing my mind to it I could bemissing out on something really promising.

Finally, I decided to investigate MLM for myself—even to the point of seriously trying one highly ratedprogram in an effort to prove for my self whether or notmy original objections to MLM were valid. They were. Amore detailed account of my participation and motivationfor performing this research are included in Appendix A,along with my background and credentials.

On learning of my experience, many MLMenthusiasts from other companies suggested I try anothercompany. But I felt my time and resources were tooprecious to waste. Besides, I was more interested in MLMas an issue for consumers generally than as a money-making vehicle for myself. If most MLM programs aremerely cleverly disguised pyramid schemes with all thenegative fallout of naked pyramid schemes, consumersneed to be warned.

I decided to perform an informal telephone survey ofpersons who had had experience with a wide spectrum ofother MLM programs. These included a variety ofcompensation systems—breakaway, binary, matrix,unilevel, etc. But all were organized as a multi-levelhierarchy of distributors.

After hundreds of phone calls, I learned that evenmodest success (say, a minimum wage for the time spent)was extremely rare. After expenses were subtracted,including product purchases that would not likely haveoccurred had they not been enrolled in the program, thevast majority lost money, and some a great deal of time.Generally, those who invested the most, lost the most.

Though legitimate products are offered andrecruiting fees for participation are disguised oreliminated (thereby getting around laws forbiddingpyramid schemes), it became apparent that MLMgenerally is as pyramidal as any illegal pyramidscheme that could be conceived. As one MLM authoradmitted:

This “pyramid” effect reinforces the philosophy ofmany people in the MLM industry that the best way tomake a substantial income with the least amount of actualselling is to recruit other people to do the work. Income istherefore generated through establishing the network,and not through the actual selling of products.Interviews with current MLM salespeople anddistributors [from 11 different MLM companies]

revealed a startling 100% that expressed this samephilosophy.12

One thing that my interviews revealed was asurprising number of maxed out credit cards, foreclosedhomes, bankruptcies, and broken homes resulting fromcompulsive participation in MLM programs. A relative ofa couple caught up in such a tragedy reported thefollowing about one MLM addict:

He went bonkers with his latest MLM deal. He feltthe necessity to buy a fancy sports car and the best suits toappear well-heeled, then quit his job and mortgaged hishome—without his wife’s permission. She was distraughtwhen she found out, but he just responded with grandioseideas and big promises.

Since she did not “catch the vision,” he felt his wifewas holding him back. He continued to call the shotswithout consulting her. She lost all trust in him, and thefamily began to unravel. They lost their home and woundup in bankruptcy. She was embarrassed when they wereforced to move in with her parents.

This couple finally divorced. Living in a trailer, he isstill chasing his MLM dream. He doesn’t make alimony orchild support payments. Why should he? Plenty of moneyis always just around the corner. Then he will catch up.13

MLM supporters are quick to point out that suchirresponsible behavior had more to do with the personthan with the program. But my interviews convinced methat such “multi-level junkies” are more common than isoften acknowledged—certainly more common than inother types of businesses I have observed. For at leastsome participants there seems to be an addictivecomponent to multi-level programs, whether it beMLM or illegal pyramid schemes—very much akin toan addiction to gambling.

I began sharing my research and experience inspeeches to groups, and the feedback was interesting. Onetax accountant said he had worked for H&R Block as oneof the principals in northern Utah for many years, duringwhich time his group had completed about 15,000 taxreturns, several hundred of whom were MLM distributors.He said that in all that time he could remember only oneof the MLM distributors who had reported a net profiton his return—and that person was bankrupt within ayear!

This observation caught my attention. So I surveyedother tax accountants, financial planners, insuranceagents, and other professionals who had access to people’sfinancial records. Their responseswere very similar—actual profits resulting from MLMparticipation were extremely rare. This heightened mysuspicion that MLM was in fact a pyramid scheme—masked as a legitimate system for marketing products.

If in fact less than one in 100 or one in 1000distributors ever earns a profit from MLM, that in itselfwould lean towards multi-level programs being classifiedas a bogus business opportunity—or as a pyramid scheme,depending on the definition— rather than as a legitimate

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business. This is especially true when such programs aretouted by MLM promoters as “the opportunity of alifetime,” etc. At the very least, MLM’s should bewatched for violations of laws against deceptive salespractices, such as overstating potential earnings.

CHALLENGE TO THE INDUSTRY: “PROVEME WRONG”

As feedback began coming in, I began to see patternsdisplayed by MLM’s that were eerily similar to illegalpyramid schemes. One was a system of overrides in whichupline persons would receive as much in commissionsfrom sales as the front-line distributors making the sales.This appeared to result in extremely large payouts to topdistributors, while those beneath them received little or noremuneration from the company. And retail prices weretoo high to sell at retail. So the emphasis was naturally onrecruiting—if any money were to be made.

Taking a frontal approach, I wrote a letter to thepresidents of 60 of the most prominent MLM companiesand shared my conclusions in a report and request forinformation (Appendix B). I called it “The NetworkMarketing Payout Distribution Study.”14

The report began with a challenge to each presidentto prove me wrong by revealing the breakdown of payoutby percentiles to distributors in his/her company thatcould be used for comparison—and to reveal (if such werepresent) the extreme horizontal inequality that wouldcharacterize a pyramid scheme. If they desired to provemy conclusions wrong they had an opportunity and aformat for doing so.

I even gave these executives a choice between asimple and a more comprehensive report option,depending on how definitive they wanted to be. A database consultant assured me that my request could besatisfied by a good programmer in only one or two days ofeffort, using the existing data base of most any modernMLM company.

While a few promised to cooperate, none of thepresidents ever finally released the requested data, evenwith the promise that it be kept confidential. It seemedthat none were able or willing to demonstrate that theywere not a pyramid scheme by revealing percentilebreakdowns of payouts to distributors that could beused for comparison and analysis.

I informed these MLM executives that if they wereunwilling to supply the needed data, I would publish theinformation that I had, with the report’s conclusionsasserted by default, since the companies themselves werethe only ones who could furnish the data to adequatelyrefute them.

I also issued the same challenge to MLM industryrepresentatives and pro-industry “experts,” but none wereable or willing to comply with my request.

At least I have obtained useful insights through theback door by asking questions about net income of peoplewho handle the money of MLM distributors. While theirrecollections were revealing and probably correct, validconclusions cannot be drawn from them exclusively.

It would be extremely helpful for consumers andresearchers to secure release of valid data from MLMcompany executives on payout distribution. I can’t forcecompliance—though enforcement agencies could, and Ibelieve should—considering the large amounts of moneywhich are at stake for consumers.

NAKED PYRAMID SCHEME VS. PRODUCT-BASED PYRAMID SCHEME

To distinguish between typical pyramid schemes andthose masking as MLM’s, I will introduce two terms thatshould help clear up the confusion between the two, alongwith some features which they have in common.

A “naked pyramid scheme” refers to a blatantpyramid scheme that is easy to detect because no productsare offered, merely a participation fee or “investment.”Chain letters work on the same principle. A continuouschain of “participants” or “investors” is recruited, inwhich each pays a fee to participate and receives moneyby recruiting others into the system.

We may call them “participants,” rather than“distributors,” because no products are offered. Sometimesparticipants are referred to as “investors,” a misnomerbecause there is no title to property or legitimatesecurities.

A product-based pyramid scheme, or PPS, is exactlywhat the name implies. A PPS is similar to a pyramidscheme, except that products are purchased bydistributors, primarily for resale—supposedly. Suchproduct purchases, often combined with other incentives,qualifies distributors for commissions in ascending levelsin the distributor hierarchy.

As this paper demonstrates, the negativeconsequences of PPS’s are far more severe than themost blatant naked pyramid schemes because they areharder to detect and can grow to mammothproportions before they are detected or transmigratedto new pyramids with new products—or moved on tonew countries. This is how some of the more durableMLM’s have survived. Some U.S.-based MLM’sexpanded into vulnerable countries in Asia whenregulatory agencies in this country began investigatingthem.

Some have considered any MLM program as exemptfrom laws against pyramid schemes, as long as theprogram offers legitimate products, which can be retailedthrough its distributor hierarchy. A moment’s reflectionwill reveal the fallacy behind this logic (though statutes in

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some states, such as Utah, are weakened by thisdistinction).

As suggested above, if such an exemption wereallowed, a pyramid promoter could initiate a PPSdistribution system that in all other respects was like anaked pyramid scheme and then introduce qualityproducts to legitimize the pyramid scheme. All theywould have to do is create the illusion that theemphasis is on retail sales, not recruiting (which isinherently an illusion in most programs, due to RVE-EHI,discussed later). This is precisely what many MLMcompanies have done in order to minimize regulatoryscrutiny while they conduct pyramid distributionschemes.

In trying to identify what PPS’s have in commonwith chain letters and naked pyramid schemes, I foundtwo major characteristics which the three of them have incommon and which cause most of the problems inherentin all types of pyramid schemes. A third characteristicusually found in PPS’s—significant purchase quotasand/or recruiting incentives—adds leverage and power tothe scheme.

In my opinion, the issue is not whether or notproducts are offered or whether the emphasis is onrecruiting or retailing. The latter emphasis is merelythe effect, not the cause, of the problem—which is thehighly leveraged MLM compensation system.

While this may seem confusing to some, I willsometimes use the acronym “PPS” to refer to the moregeneric practice of product-based pyramid schemes.“MLM” will be used in most cases, however, whenreferring to accepted MLM programs. If it were morewidely accepted I would use PPS in every case, simplybecause the MLM designation has evolved into “networkmarketing,” “consumer direct marketing,” etc. I suspectnew terms will arise, but they could all eventually fallunder the generic umbrella of PPS.

TYPES OF MLM COMPENSATION SYSTEMS

A frequent argument of MLM promoters is thatwhile they may agree that there are problems in the MLMindustry, each will claim they have solved the problemswith their new brand of MLM compensation system,which is supposedly more fair, honest, generous, etc., thanall the others. I believe the three defining elementsdiscussed here will reveal the fallacy of these new,improved systems, so far as “correcting the problems” socommon in the MLM industry.

Why are compensation systems so important toMLM promoters? Because they are at the heart of whatMLM is about. As one promoter admitted in a meeting Iattended, “Our compensation system IS our product.”

Some of the common compensation systems used byMLM companies are as follows:

Unilevel systems, which allow an unlimited numberof recruits on the front line. However, there is a limit onthe number of levels deep that can qualify forcommissions or overrides. Unitary systems could bereferred to as simple or broad-based pyramids.

Matrix systems, which are shaped in the form ofblocks, or matrixes, which have limits on how manydistributors can be recruited into one’s front line. Thesecould be referred to as blocked or flat pyramids.

Binary systems, in which recruiting is done in adownline of two legs, with incentives to maintainmatching volume, or a balance, between the two legs.Binary systems are really matrix systems limited to two“profit centers” that may continue recruiting of downlinedistributors indefinitely. Binary systems could beconsidered split pyramids.

Stairstep/Breakaway systems allow distributors toascend a stairstep of levels in a hierarchy of distributorbreakaways. Each breakaway is a separate organizationtied to one person who draws overrides from the entirebreakaway organization. When tied to minimumrequirements for breakaways on the front line, anextremely leveraged pyramid scheme results, in whichenormous payout to top level distributors is financedpartly by commissions from purchases of hundreds oreven thousands of aspiring distributors beneath them—thevast majority of whom lose money.

Stairstep/breakaway systems are really nestedpyramid schemes, with many pyramids (oftenpolypyramids) nested within a master pyramid or mega-pyramid. The effects, in terms of losses to participants, farexceed those of naked pyramid schemes, which areconsidered illegal. In the author’s opinion, if any of theproduct-based pyramid schemes were found to beillegal, stairstep/breakaway compensation andmarketing systems should be at the top of the list.

Other MLM’s or PPS’s may exist and will continueto be developed, as creative pyramid promoters seek newways to make a fortune and to circumvent legislationagainst pyramid schemes or to avoid arousing regulatoryscrutiny. In many cases, before regulators figure out whatis happening, the promoters have made their fortunes andmoved on. Seldom is much or any of the money recoveredfor the victims of these scams.

DEFINING CHARACTERISTICS OF APRODUCT-BASED PYRAMID SCHEMES(PPS’s)

All durable PPS’s have certain features in common,and MLM’s tend to display these features. When all threeof the characteristics below exist in a PPS, the programwill lead to all the effects of a naked pyramid scheme(often much worse in the long run) if not detected andstopped. The vast majority of participants lose whatever

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time and money they have invested, while the companyand a few upline distributors profit from their losses.

PPS DEFINING CHARACTERISTIC #1: Achaining hierarchy of levels of distributors— morethan is functionally justified—is recruited withoutarea limits, which leads to extreme leverage andperceived saturation in the marketplace.

The MLM concept has great appeal to some people,especially marketers who find it tedious and expensive togo through standard distribution channels. The notion of“people telling people” or “word-of-mouth advertising”has wide acceptance. But problems occur when such directmarketing is tied to a chaining of distributors withoutappropriate market controls. When this happens, youoften see the following:

a. A multi-level hierarchy of several levels ofdistributors—more than is functionally justified forproviding products and services in a given market area

For even the largest of conventional distributorarrangements, the entire U.S. can be covered by amaximum of five levels in the distributor hierarchy; e.g.,front line sales person, plus local and/or district, regional,and national sales managers. More than that issuperfluous and bloated, driving up product prices andmaking sales at a competitive retail markupunprofitable and unrealistic.

When several levels are allowed in a multi-levelhierarchy of distributors, there is seldom any functionaljustification for doing so other than to encouragerecruiting and the illusion of very large potential incomesto more people than is mathematically possible—ahallmark of pyramid schemes. Also, with an upline ofmany levels, all getting overrides from the sales offront line distributors, the top level distributors may beprofiting to an extreme degree from the losses(including product purchases) of those beneath them.

Such exorbitant incomes result from the reaping ofhuge overrides from the combined efforts of hundreds oreven thousands of downline distributors. MLMpromoters refer to this as “residual income” or“leverage”—large payouts disproportionate to effortexpended, resulting primarily from the purchases ofdownline distributors.

Leverage can be illustrated by adding up a downlineof MLM distributors that is extended to five levels—although many programs allow for many more levels. Butfor the purpose of illustration, assume that a distributorrecruits five active distributors, each of whom recruits fivemore, and so on through five levels of distributors. Theexponential growth of the pyramid becomes evident:

Level 1: 5 distributorsLevel 2: 25+5=30 total distributors

Level 3: 125+30=155 total distributorsLevel 4: 625+155=780 total distributors

Level 5: 3,125+780=3,905 total distributors

If each distributor were to buy enough products eachmonth to yield an override of $10 in commissions andbonuses to the original upline distributor, then with afour-level downline, the distributor gets $7,800 permonth, while with a complete five-level downline thesame distributor gets $39,050 per month. Of course, itseldom works out that way, but these are the type offigures that are often presented to prospective new recruitsat MLM opportunity meetings.

This example illustrates why so much emphasis isplaced on recruiting as opposed to selling products topersons outside the pyramid. $39,050 is much moreappealing than $50 that might be earned by a Level 1distributor for selling the products (assuming $10 totalcommissions from each of five customers). When adistributor is rewarded over 781 times as much torecruit as to retail products, it does not require asurvey to determine where the emphasis will be.

What is often not factored into projections madeat opportunity meetings is the expenses of conductingthe business. If operating expenses plus productspurchased from the company (which would not likelyhave been purchased if the person had not been aparticipant in the program) are subtracted fromcommissions, few are making any profits—except forthose at the top levels in the distributor hierarchy. Thevast majority are losing money, only to fatten the bankaccounts of their respective uplines, from commissions ontheir product purchases.

From the above example we can see that limitedleverage is seen in an MLM program (or PPS ) untilseveral levels are included. The extent of aggregateinvestments—usually experienced as losses—ofparticipating distributors to support upline gains would bemuch more limited with a small number of distributorlevels. In fact, with less than five levels, the system wouldprobably die out for lack of opportunity for ambitiousparticipants to receive extremely large override checksfrom downline purchases. Blatant appeals to greed wouldbe lessened. This is why most PPS’s allow for severallevels of distributors.

b. No territorial protection to prevent saturationThough not normal for MLM’s, if reasonable

territorial protection is not offered to participants in agiven area, the program will ultimately collapse frommarket saturation. Recruiters promote the illusion of anever-expanding market and of the potential for largepayouts for virtually all new recruits.

With unlimited recruiting in a given area, newdistributors soon find it increasingly difficult to recruitmore distributors. This is due to perceived market

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saturation, wherein prospects perceive limited opportunityto profit from participation.

To illustrate an approach more in line with marketrealities, suppose the program were limited to onedistributor for each 10,000 population in a given area orto one distributor in each one-mile radius—much like theterritorial protection of a retail franchise. Then theproblem of saturation would not be as significant. Butlimiting the amount of recruiting or the number ofdistributors in a given area is highly uncharacteristic ofPPS’s because that would lessen the illusion of thepotential for very large payouts for new recruits. Suchlimitations would render a PPS impotent.

PPS company leaders, sensing perceived saturationand potential collapse, often develop new “divisions” orgeographic “territories” (such as in vulnerable states orcountries with weak anti-pyramid laws) to start newpyramids and thereby keep their top distributors happy.

PPS DEFINING CHARACTERISTIC #2:Relative vertical equality (RVE) in distributorcompensation leads to an emphasis on recruitingand to extreme horizontal inequality (EHI) over theentire network of distributors.

While researching this subject, I often asked myselfwhy MLM is so pyramidal in concept, motivation, andeffects, and yet has been so successful in avoiding thelabel of “pyramid scheme.” After careful comparison ofthe compensation systems of MLM’s with pyramidschemes, I found a striking similarity. I call it relativevertical equality (RVE) in commission structure. It workslike this:

Let us suppose a person selling a MLM product getspaid a 5% commission from the MLM company. This isnot much, but he/she is told that the product can be sold ata 30-40% markup to retail customers. However, since theproduct is priced so high to begin with, the distributorwinds up selling it wholesale and hoping to make moneyrecruiting and getting overrides from a downline. Thedistributor gets 5% from those he/she recruits, 5% fromthose they in turn recruit, and 5% from those belowthem—and so on until the maximum number of levelsallowed in the program. Vertical equality looks like this:

5% paid to the top distributor in the hierarchy

5% paid to the next highest distributor in the hierarchy

5% paid to the next distributor in the hierarchy

5% paid to the distributor who recruited the person who sells the product

5% paid to the distributor at the bottom of the hierarchy who actually sells the products

Whenever I have shown this 5-5-5-5-5 verticalequality structure to a group of consumers, many of themresponded, “What’s wrong with that? Everyone gets theirfair share.” What they don’t recognize until it is pointedout to them is that vertical equality is exactly how illegalpyramiding or chain letters work. Incidentally, the 5-5-5-5-5 per cent structure is for illustration only. A widevariety of compensation patterns is used in MLM and thepercentages and levels of payout vary greatly, but relativevertical equality in total compensation per unit of sale iscommon to nearly all MLM programs.

To further clarify that last point, strict verticalequality is not always evident in MLM programs,especially when the compensation systems includeescalating commissions at higher levels in the distributorhierarchy and/or extensive and complicated bonuses andawards. But after all aspects of compensation arefactored in, when a distributor on the front line getsrelatively the same total payout per sale from theMLM company as a hierarchy of distributors three ormore levels above (the upline), you have what I callrelative vertical equality (RVE). Nearly all MLMprograms show this characteristic, as do all pyramidschemes.

Each successive level theoretically increasesgeometrically the number of persons in a distributor’sdownline until perhaps thousands eventually are eachcontributing 5% from their sales (or purchases). This iswhere the leverage and the real money is. I saw aphotocopy of a monthly check to a founding distributor ofa major MLM company in the amount of $400,000.That’s over $5 million a year! This is also why so littleemphasis is placed on selling the product. Selling the“opportunity” is where the money is. As psychologistslearned decades a go, you get the behavior you reward.

So what is the consequence of RVE in compensationsystems? It leads inevitably to extreme horizontalinequality (EHI) in payout over the entire network ofdistributors. A relative handful of distributors receivehuge paychecks, while over 90% (often over 99%) comeaway empty—actually losing money in most cases, afterexpenses are subtracted.

Table 1 shows the pattern of EHI in payoutdistribution in one prominent MLM company which isrequired by consent decree with the FTC to releaseaverage income figures by distributor levels. The

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information contains some statistical inconsistencies,which are here corrected, using the best informationavailable to me. While the leverage demonstrated in thisexample is highly extreme, most any MLM willdemonstrate leverage beyond the norm for an acceptablebusiness opportunity.

Based on the foregoing, I believe a similar patternexists among distributors in most MLM companies. Suchpatterns could be verified by the release (by MLMcompany executives) of data on company payout todistributors by percentiles. Lacking that, I can only offermy estimate of what those patterns look like, based onextensive interviews and personal observations, includingthose of the company illustrated in Table 1.

Note that—unlike other corporate and smallbusiness arrangements, most MLM distributors windup losing money—assuming all expenses and productspurchased from the MLM company are taken intoaccount.

In essence, RVE inevitably leads to EHI. EHI couldeasily be tested by requiring MLM companies to revealpayout to distributors by percentiles for all distributors—not just the “active” ones. (Again, see my “NetworkMarketing Payout Distribution Study,” Appendix B.)

If companies were required to disclose thesestatistics, I believe some startling information would comeout. It would not surprise me to see many companies inwhich projections of very large incomes offered to recruitswere in actuality achieved by far lessthan 1/10 of one percent of all distributors recruited intothe network.

I believe the focus on pyramid schemes as programswhich emphasize sales rights, rather than the sale ofproducts and services, is inadequate. Other factors need tobe factored into any attempts to determine what is apyramid scheme.

This issue may be both the heart and the Achillesheel of the MLM industry. RVE-EHI, combined withchaining more levels and recruiting more distributorsthan is functionally justified, is at the core of most PPSprograms, and they are their most vulnerable featureswhen understood.

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TABLE 1: Which distributors get the money paid out by one highly leveraged MLM?Based on the company's official report: "1998 Actual Average Incomes"

Number ofDistributor levels distrib's* Income** *The total number of distributors w ho received no commissions is calculated at1. Blue Diamonds 102 $480,404 eight times the reported number of "actively participating distributors," including2. Diamond 57 $154,582 a minimum estimate of those w ho terminated or became inactive. This gives a more3. Emerald 51 $53,422 realistic view of the odds of success, w hich are extremely low , by any standard. 4. Ruby 121 $27,0715. Lapis 419 $12,409 **Note that most of the income goes to Blue Diamond distributors, w ith all but 6. Gold 705 $6,611 a few distributors receiving nothing from the company. In fact, the vast majority7. Executive 1,690 $4,622 lose money, after subtracting operating expenses and product purchases.8. Qualifying Exec. 292 $2,9899. Distributor*** 5,590 $378 ***The income figures show n include adjusted estimates of sales at retail prices,

dist's*** 508,160 $311 (after correcting for information based on a questionable survey)

Actual income for levels 9 & 10 (and most likely levels 3 to 8) w ould be show n

as losses, after subtracting operating expenses and product purchases.

Such extreme inequality (EHI) in payout to distributors is the direct result of relative vertical equality (RVE) in a product-based pyramid scheme.

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

Distributor levels

Income by levels

Distributor Number of distributors income by level at each level(dark columns) (light columns)

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PPS DEFINING CHARACTERISTIC #3:Significant purchase or recruiting quotas arerequired (or incentives offered) to qualify forincreasing bonus levels or purchasing discountsin an ascending hierarchy of payout levels. Thisis referred to as the “pay to play” feature of apyramid scheme.

While this may not be a necessary feature of aPPS, it is a prominent feature in enduring PPS’s. The“successful” (in terms of lasting more than a year ortwo) MLM’s make it difficult for a distributor to besatisfied at any level of sales already accomplished.Higher bonus levels for recruiting more distributors orfor moving more products keeps success-motivatedparticipants on a continual treadmill. As a result, theyoften purchase more than they need for themselves orthan they can realistically sell, especially at theexcessive retail prices suggested for many MLMproducts.

As already discussed, if such productpurchases—and other operating expenses—weresubtracted from commission checks, very few would beshowing an actual profit. Then, to add insult to injury,MLM companies or their distributors often stronglyrecommend attendance at seminars and conventionevents—for a fee—and purchase of training materials,and sales “tools,” all of which add to the cost of doingbusiness.

A related problem occurs when a distributor buysenough products to achieve a certain level of payoutqualification and has to continually buy a certainminimum quantity of products to maintain that level.When they find they can’t sell them and finally quit,they are left with a garage or basement full ofproducts. I and other observers have found this to be acommon problem with MLM’s, regardless of rulesagainst stockpiling.

From the standpoint of the MLM company, suchminimums and the sales of such sales aids helpguarantee continued business and profitability. For itstop distributors, override commission checks are muchlarger. The losers are the downline distributors whooften are not fully aware of how much the business iscosting them in time and money.

Pyramid schemes masquerading as MLM’sare often allowed to grow and flourish uncheckedbecause they do not require a large up-frontenrollment fee to sign up. Because recruiters oftendo not profit from the initial recruitment of adistributor, it is assumed the program is not apyramid scheme.

In fact, nothing may be further from the truth. Asmentioned, MLM companies typically incorporateescalating incentives to purchase products (sometimesat initial signup, sometimes later) to qualify for ever-higher levels in the distributor hierarchy and/or forlarger discounts on product purchases. Enforcementofficials sometimes refer to this as the “pay to play”feature of a [product-based] pyramid scheme.

Also, because of a compensation system with rewardsfor recruiting a certain number of distributors (orescalating incentives to recruit more and moredistributors), many of the more ambitious distributorswill recruit “dummy distributors” from friends andfamily members and buy products in their names. It isnot until they leave the system that the more astuteamong them realize that they have in effect paid a verylarge fee (in the form of product purchases) forparticipation in a pyramid scheme. Often this amountsto many thousands of dollars over a period of months.

Such an amount paid into a naked pyramidscheme would immediately arouse suspicions by thepublic and by enforcement agencies of its constitutingan illegal pyramid scheme. But as already stated, sincethe money paid into an MLM program is paid forlegitimate products and over a period of time, mostparticipants (and many regulators) fail to see it as aninvestment in a pyramid scheme. However, this “payto play” feature of a product-based distributionsystem is often a clear indication it is in fact anillegal pyramid scheme.

Many observers believe that MLM products aresold at a premium to support a large downline. If anMLM product were to be sold at a premium of $20more than competitive products sold through otheroutlets, the $20 premium could be considered thepyramid premium portion of the price, which wouldflow to the top of the distributor hierarchy in typicalpyramid fashion.

Also, as mentioned above, powerful incentivesmay be built into the program for the distributor tobuy much larger quantities of the product thanhe/she can realistically sell in order to qualify forever larger payout (or discount) percentages. Thisis why incentives for purchases over a period oftime need to be considered in calculating the cost offully participating in the scheme.

THE KEY PROBLEM WITH THE FTCDEFINITION OF A MULTI-LEVELMARKETING PROGRAM

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The Federal Trade Commission (FTC) defines amulti-level program as follows (problems are noted initalics)—

[multi-level marketing is] any marketingprogram in which participants pay money to theprogram promoter in return for which the participantsobtain the right to

(1) recruit additional participants, or to haveadditional participants placed by the promoter or anyother person into the program participant’s downline,tree, cooperative, income center, or other similarprogram grouping;

(2) sell goods or services; and(3) receive payment or other compensation;

provided that:(a) the payments received by each

program participant are derivedprimarily from retail sales of goods orservices, and not from recruitingadditional participants nor havingadditional participants placed into theprogram participant’s downline, tree,cooperative, income center, or othersimilar program grouping, and

(b) (b) the marketing program hasinstituted and enforces rules to ensurethat it is not a plan in whichparticipants earn profits primarily bythe recruiting of additionalparticipants rather than retailsales.1(rep)

The major problem with the latter part of thisdefinition is that “rules” are not sufficient to overcomethe tendency to invest one’s efforts and money wherethe greatest return is perceived to be, unless suchrules address the fundamental compensationsystems that cause the problems with MLM’s. Thisis especially true where such incentives are literallyhundreds (even thousands) of times greater thanrewards for complying with the “rules” —such asrecruiting a large downline versus selling products atretail to non-distributors.

Any dog owner knows that if you place a fivepound package and a one ounce portion of hamburgerin front of a dog—two feet apart—the animal willmove first to the larger package before considering thesmaller one. It would be very difficult to convince adog with a rule or command that it would be to hisadvantage to forsake the large package for the tinyone.

This is why researchers such as myself haveobserved widespread ignoring or circumventing ofsuch rules by MLM distributors. The same can be saidfor misrepresenting product effectiveness or incomepotential. When the compensation system indirectlyprovides extreme rewards for stretching the truth,

while severely penalizing honesty, the result ispredictable.

However, even when actions are taken by theFTC and state agencies against MLM’s, it issometimes difficult to validate and enforce thoseactions, especially since the larger MLM’s havedeep pockets and can often find ways around suchrulings. For an agency to enforce action againstMLM’s as PPS’s requires the prosecutorial will andthe resources to do so.

For example, according to research done at theoffice of the Attorney General of the state ofWisconsin, Amway blatantly ignores “the Amwayrules” to avoid FTC action for conducting a pyramidscheme. These include:

(1) the “70% rule” (distributors must derive atleast 70% of their income from retail sales to non-distributors) and

(2) the “10-customer rule” (an Amwayrepresentative had to prove that he/she has made atleast 10 retail sales each month). 15

In1993, NuSkin International, Inc., was orderedby the FTC to provide information on average incomesfor distributors, but using statistical sleight of handwas able to hide relevant information on the odds ofsuccess from prospects and from enforcement officialsreviewing their program. Their annual report entitled“Actual Average Incomes,” showing average incomesfor each level of “actively participating distributors” ismade available to anyone who requests it.

An uninformed prospect reading the report is ledto believe that 100% of those who make an effort asnew distributors in the NuSkin “business opportunity”earn a profit. But close inspection by an analyst who isfamiliar with their program revealed somefundamental flaws in their reporting.

The actual odds of success for all distributorswho attempt the NuSkin program (after all expensesare subtracted, including product purchases) isprobably less than 1/10 of 1%! It is astounding thatNuSkin has been allowed to continue misleadingconsumers for so long, resulting in hundreds ofthousands of persons investing in the NuSkinprogram—who probably would not have done so hadthey been furnished correct information.16

Apparently until now, the Enforcement Divisionof the FTC has considered NuSkin in compliance withits 1993 Order to cease and desist misrepresentingearnings. However, I understand NuSkin’s compliancewith the order is now under review, so hopefully thissituation will change.

If a distributor tells prospective recruits that theyhave one chance in 10,000 of making a profit for theirefforts, what are the chances he/she will be successfulas a recruiter? Would a recruiter who gave out such

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honest statistics be likely to rise to the level of a topdistributor where the real money is to be made?

Or if the distributor tells prospects that his/herproducts are not as effective as its promoters claim orthat a comparable product can be purchased for halfthe price elsewhere, what is the likelihood that enoughsales will be made to advance to the next bonus level?Full and correct disclosure should be mandatory.

What are needed are not rules or artificialcontrols for MLM that are ineffective, butfundamental changes in compensation andmarketing programs to correct the underlyingproblems of MLM’s. Of course, you would then nothave MLM as it exists today. The extreme leveragewould be eliminated. The resultant altered programwould probably wind up being a more conventionalmarketing system that has proven the test of time.

In my opinion, most MLM companies are PPSvariants—fundamentally unsound and inherentlyfraudulent. Distributors are doomed to failure, withthe exception of a few at the top of the distributorhierarchy, as is true with any pyramid scheme.

NEEDED: A MORE PROACTIVEAPPROACH TO ENFORCEMENT OFLAWS AGAINST PYRAMID SCHEMES ASAPPLIED TO MLM’S

One of the insidious features of many MLM’sis that promoters often aggressively harvest therewards from building their pyramids anddisappear before enforcement agencies can catchup with them. The more successful MLM’s addproducts and divisions and grow to a size that makesenforcement very difficult.

The largest of the MLM’s have very deep pocketsand can endure regulatory actions through legalmaneuvers, statistical reporting deceptions, publicrelations ploys, donations to political parties in powerand to influential officials and groups, and lobbyingagainst legislation which would make anti-PPSenforcement easier.

Unfortunately, most enforcement againstpyramid schemes masquerading as MLM (ornetwork marketing) is reactive, not proactive.Victims of PPS’s seldom complain, having beentutored that anyone can succeed if they will only tryhard enough to “work the system.” When distributorsquit, they usually leave quietly, too embarrassed tocomplain to anyone. Many will even apologize to theirupline for having failed. So agencies that enforcelaws against pyramid schemes by acting on thebasis of number of complaints will often be acting

after the fact. The damage is done before anyaction is taken, and victims are not likely tosignificantly recover their losses.

So enforcement agencies are at a disadvantagewhen they wait until many complaints are filed toenforce laws against pyramid schemes. Investigationsinvolving interviews of company representatives,surveys of participants, analysis of financial records,and other typical evidence gathering are time-consuming and often inconclusive.

The above characteristics, however, are easy toidentify with a careful study of the compensationsystem and marketing structure of the company byinvestigators with expertise in principles of marketingand elementary statistics.

It can be demonstrated that the prognosis forany company that incorporates these three featuresinto their compensation and marketing plan iscertain: an emphasis will be placed on recruitingover sales of products and services—regardless of“rules” or company policies to the contrary. Again,behavior that is powerfully rewarded is more likelyto occur than weakly rewarded behavior.

An agency that uses these tools skillfully canidentify PPS’s at the first sign that such a companyis starting up. Enforcement action could thus betimely and thereby prevent major losses.

The best scenario would be for legislation to bepassed (or rulings by enforcement agencies)requiring submission of the compensation andmarketing plan by any MLM company at startup.The application to do business could then beapproved or rejected, based on carefully designedmathematical and/or defining criteria, such as thethree explained above. It is my sincere hope that thispaper will encourage such a proactive approach.

It is my belief, however, that PPS’s can beidentified for enforcement action, using the toolsprovided herein to interpret and apply the FTCdefinition and most state statutes as they stand.

SYNDROME ANALYSIS—A TOOL FORCORROBORATING THE EXISTENCE OFA PYRAMID SCHEME

I have researched this topic for five years andbelieve my facts and perspective on this issue to beaccurate. Unlike investigators working at enforcementagencies, I have had first-hand experience myself as adistributor, as well as having gathered the experienceof distributors from a wide variety of MLM programs.

Let us look at another approach for identifyingPPS’s. The very mention of the word “pyramid” in

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MLM circles can elicit a torrent of rebuttals—many ofwhich will hinge on the FTC’s original ruling thatAmway was not an illegal pyramid scheme.

I maintain that just because some MLMprograms do not meet a narrow interpretation of whatis legally a pyramid scheme, they can still bepyramidal in concept, motivation, and effects. In fact,over time most MLM programs are morepyramidal in their effects than naked pyramidschemes, simply because of the vastly greatervolume of income accruing to the company and to topdistributors as time passes, stretching from months toyears. This typically does not happen with nakedpyramid schemes, which are usually discovered andshut down fairly quickly.

Sometimes it is useful to borrow definitions andconcepts from a seemingly unrelated field of humanactivity in order to better define what may defy ourcurrent categorizations. For example, in the field ofmedicine, recent advances have led to the recognitionof a whole class of diseases that defy ready explanationor diagnoses. These are often referred to as“syndromes.”

My dictionary suggests two definitions for theword “syndrome” that apply for the purposes of thisdiscussion:

1: a group of signs and symptoms that occurtogether and characterize a particular abnormality and

2: a set of concurrent things (as emotions oractions) that usually form an identifiable pattern.”17

The syndrome method of classifying illnessallows a physician to identify a disease orpsychological disorder when several if not all of thesymptoms are present. For example, if at least five outof ten symptoms characteristic of a disease are present,a doctor may say that a given person has that illness.Examples of syndromes would be fibromyalgia,Tourette’s syndrome, or attention deficit disorder(ADD).

While not an obvious pyramid scheme by thestrict legal definition used by the FTC, I willdemonstrate that the MLM model can be viewed as apyramidal syndrome, with concept, motivation, andeffects almost identical to any pyramid scheme. Thistype of analysis may not be as useful as the definingcharacteristics discussed above for proactiveidentification of a pyramid scheme, but it could beuseful in corroborating what they denote.

In this paper, we shall use the convention ofcharacterizing a syndrome with a multitude ofsymptoms, not all of which need be present toconstitute the syndrome.

Confronted with the charge of being a pyramidscheme, MLM apologists typically respond that a

pyramid structure is common in all large businessesand other organizations. You have a president at thetop, vice presidents under the president, middlemanagers under them, front line supervisors, andfinally the front-line work force.

I maintain that many significant features(symptoms) separate a “pyramid scheme” syndromefrom normal business organizations. To suggest that“all organizations are really pyramid schemes” isnaïve.

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SYMPTOMS OF A PRODUCT-BASEDPYRAMID SCHEME (PPS) SYNDROME

I would suggest that a MLM program is apyramid syndrome if perhaps twenty or more of thefollowing 28 characteristics are in evidence:

PPS concept and structure common to all pyramids

1. A multi-level hierarchy of distributors isrecruited under sponsoring distributors, allowingmore levels in one’s “downline” than is functionallyjustified to serve even a very large customer base.

While all sizable organizations display ahierarchical structure in order to function efficiently,the MLM hierarchy is characterized by many levels,which spring primarily from recruiting and placementinto successive levels for payout purposes. This is insharp contrast to the normal pattern in more normalorganizations, in which selection of persons forsuccessive levels of responsibility is based onorganizational need and managerial skills.

2. In any given area, unlimited recruiting ofdistributors—each of whom may be encouraged torecruit—is permitted.

With unlimited recruiting in a given area, newrecruits soon find it increasingly difficult to recruitmore participants into the system. This is due toperceived market saturation, wherein prospectsperceive limited opportunity to profit fromparticipation. The program will therefore eventuallycollapse from perceived, if not actual, marketsaturation. Franchises and legitimate distributorshipsgenerally get around this problem by offering someterritorial protection.

3. Total payout to distributors is characterized byrelative vertical equality (RVE) in totalcompensation per sale to distributors by thecompany.

This means that the person actually selling theproduct earns little more in total payout per salefrom the company than an upline distributor threeor more levels up—who had little to do with thesale. This also necessitates recruitment in order toachieve any significant income, since companypayout for the actual sale is not enough of anincentive to concentrate on the products themselves.

While distributors can profit from selling theproducts at a marked up retail list price, thedistributor’s wholesale cost is usually too high for amarkup to a competitive retail price, so products are

sold at wholesale or too far below list price to providesignificant retail profit margin.

Some MLM programs have a complexcompensation system of commissions, bonuses, andother incentives that make it very difficult to assess theextent of RVE that exists. However, RVE becomesmanifest when extreme horizontal inequality (EHI) isdisplayed in compensation over an entire network ofdistributors. (See # 19 below.)

4. The illusion of virtually unlimited financialgrowth opportunities masks the mathematicalreality of limited advancement opportunities.

Charts of compensations systems in MLMprograms often show an almost limitless opportunityfor financial growth by advancing geometricallythrough levels in the hierarchy of distributors toextraordinary incomes at the top levels. Recruitersimply that such income can be reached by anyone.Such promises of extreme financial opportunities oftenmask the reality that very few could actually make thetop level.

Pyramidal concepts that apply primarily to MLM(PPS) programs

5. The MLM program displays a pattern of rapidgrowth, then a leveling off in sales, followed by aprecipitous decline in volume.

This pattern is common to all pyramid schemesdue to a pattern of progression from phenomenalgrowth at the outset to actual or perceived saturation—perception by the public that the “opportunity” forsuccessful recruiting has passed because too manypeople already know about it. Then the whole thing—like a house of cards—collapses. For this reason, fewMLM startups last more than two or three years.

6. The more durable MLM companies avoidcollapse by initiating new pyramids, which theylabel “growth opportunities”.

The more resourceful MLM companies willperiodically introduce new product lines or divisionsor open up new countries or regions in which tooperate. Experienced distributors, seeing the collapseof the pyramids in the areas in which they have beenworking—due to actual or perceived saturation—willthen rush to establish new downlines in fresh areasthat are opened up.

7. Frequent mention is made by top distributors (ofnewer MLM companies or divisions of the samecompany) to potential recruits of “getting in on thisground floor opportunity.”

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A rare or hitherto unseen opportunity withextraordinary income potential is discussed, eventhough the bulk of the income is locked in by thefounding distributors in the pyramidal hierarchy. “Justget on board,” “ride the wave,” etc. are other typicalappeals.

8. Duplication of one’s efforts and investment isencouraged in order to build one’s downline.

Distributors are taught that through effectiverecruiting and training one can replicate one’s ownefforts through the efforts of one’s downline and thatthis process can continue almost ad infinitum untilgreat leverage is achieved for one’s time andinvestment. New recruits are taught how to recruitfrom their “warm list” of friends and family first.What they are not told is that they are only fatteningtheir upline’s override checks even after theyeventually get disillusioned and quit the program.

9. MLM recruiters in the organization promise orimply a substantial residual income (a.k.a.“permanent income”) can result from an initialinvestment of hard work for a short period of time.This supposedly leads to “time freedom”—freedomfrom having to work or trade time for pay. Inactuality, it is pyramid income.

These implied promises can vary from $1,000 to$100,000 or more a month. And some do actuallyreceive checks of that amount, but only at the expenseof those beneath them.

In one survey of MLM participants onexpectations of success, 86 % expected a full-timeincome to result from their participation, and theaverage income cited to be sufficient for distributors toquit their jobs and do MLM instead was $5,988 permonth. But remarkably, 7% responded that theamount of MLM income which would meet theirexpectation of success would be $86,000 per month!16

By the way, that amounts to over $1 million a year.What do such expectations tell us about the moreaggressive MLM promoters?

The concept being promoted is “residual income”akin to that enjoyed by wealthy investors or successfulauthors, inventors, or actors who regularly get largeroyalty checks even though most of the actual work isbehind them. This “time freedom” has great appeal topeople who feel they are slaves to the clock and totheir work. Even professional persons get involved,hoping to free themselves from the necessity ofcontinuing to provide services; i.e., trading time formoney.

10. Pyramidal money-making concepts—the life-blood of the business—are discussed or implied at

opportunity meetings and in other recruiting eventsand devices, such as audio and video tapes.

As mentioned in #8, distributors are encouragedto build their “organizations” (“pyramids” is a moreaccurate term) by duplication of their efforts. Theimplication is that a life of ease can be created,capitalizing on the efforts and product purchases oftheir downline.

Word pictures (if not actual videos or photos) ofsuccessful distributors lounging on the beach, drivingan expensive car, living in an expensive home, andenjoying their family more fully than “those poorworking types” is a common theme. Distributors areshown charts of potentially huge income resultingfrom the pyramiding of income from their recruitingefforts. These charts are as pyramidal as any seen fornaked pyramid schemes.

11. MLM distributors display an extremesensitivity to their program being referred to as“just a pyramid scheme,” in frequent references bycritics and consumers outside the program—whoperceive it as such.

Mention the word “pyramid scheme’ inconnection with their particular “opportunity,” andMLM promoters will go ballistic on you. Theirreaction is reminiscent of a line from Shakespeare:“Me thinks the lady doth protest too much.”

MLM recruiters may pull out a pamphletdistributed by the BBB or the Direct SellingAssociation—made available by the ConsumerProtection Division is some states—whose personnelmay be unaware that the DSA is financed mainly bythe MLM industry and uses the name “Direct SellingEducation Foundation” as a front. These flyersdistinguish illegal pyramid schemes from “legitimatebusiness opportunities” like MLM.s. The MLMpromoters will admit that other MLM companies maybe “thinly veiled pyramids,” but not their company.They may loudly proclaim that the FTC and stateagencies have looked at their company and given it a“clean bill of health.”

My surveys have demonstrated that consumersoften label MLM programs as “just disguised pyramidschemes.” In this respect, the gut feelings of outsideobservers may be more valid than the narrowdefinitions of some statutes or the loud protests byMLM promoters of being so labeled.MLM (PPS) recruiting practices

12. Frequent (often weekly) opportunity meetings,three-way calls, or other recruiting devices areemployed to tout promises or implications of greatwealth and/or “time freedom,” to be attained

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through patience, effort, and persistence in theparticular program promoted.

Such claims are not supported, exceptanecdotally or with average incomes of the top levels.Those who lose money—the vast majority ofdistributors—are not mentioned.

When the failure rate is brought up, the dropoutsare denigrated for being lazy or not having appliedthemselves to the program. In actuality, many of thefailures may have invested a great deal of time, money,and effort to make the program work—but theirtiming left them at or near the bottom of the pyramid.

13. Recruiting can be characterized as a “bodyshop,’ in which large numbers of distributors arecontinually recruited to replace an inordinatenumber of dropouts.

Sometimes “opportunity meetings” will beattended by dozens or even hundreds of prospects whoare given a pitch by top recruiters. Most of those whojoin eventually give up after wasting all theirinvestment and efforts, only to further enrich uplinerecruiters—who must then find new recruits to replacethe quitters.

“They didn’t try hard enough,” the MLMpromoters say of the quitters. One almost has to havebeen involved in other sales situations or businessstartups to appreciate by comparison how extreme arethe rate of dropouts for most MLM programs—wellover 90% [probably per year], according to oneresearcher.19I would guess it ranges between 95% and99% over a five year period.

14. Emphasis when prospecting is on the“opportunity,” versus the value of the productsthemselves.

In opportunity meetings and conversationsbetween distributors, little emphasis is found onproduct sales. Recruiting is where the action is.Another term for the emphasis on recruiting is “topdown prospecting”—as opposed to “bottom upprospecting,” in which persons are sold products andthen encouraged to join the recruiter’s downline. Inany case, it is made clear that the big money comesfrom recruiting a downline.

15. The distinction between the consumer and theseller of the product becomes blurred in MLMprograms.

With MLM the consumer and the distributoroften merge into one and the same person. Distributorsare encouraged to buy products in order to set anexample for their downline—to “be a product of theproducts;” and buyers of the products are oftenrecruited to become distributors.

In a typical MLM, the sellers are the buyers, andthe buyers are the sellers—to themselves. That is whythe only way to significantly increase volume is torecruit more distributors.

16. MLM companies encourage distributors torecruit family, friends, and others into its networkof distributors as a way of moving its products.

A major strength of MLM (PPS)—its potential toutilize the social capital of its participants—is also afacet of the business that offends the most people.18

People who are approached to do MLM often feel thattheir relationships are taken advantage of when theirfriends and family recruit them—placing theirrelationships “on the altar of money.”

17. Demand is distributor-driven, not market-driven.

In normal retail settings, sales are determined toa large degree by customer demand based on perceivedneeds. With PPS’s, the need for or quality of theproduct may be almost irrelevant—as long as it can beused for sales purposes to build a downline and to getaround regulatory definitions of an illegal pyramidscheme. Truck tires could be sold to car owners if saidcar owners were vulnerable to PPS schemes.

18. MLM companies charge for in-house seminarsand sales materials—a source of revenue unique tothe industry.

I was amazed to find that MLM conferences onproduct information and recruiting techniques carrieda charge even though all attendees were registereddistributors. In alternative settings outside MLM, suchconferences and sales materials for distributors sellinga given company’s products normally are offeredwithout charge. But for MLM companies, paiddistributor conferences are an added source of revenue,since distributors are gullible enough to pay to attend.In many programs, distributors will pay willingly forflyers, order forms, and other sales materials used topromote the company’s products.

Compensation systems—the true villains in PPS’s

19. As the direct result of relative vertical equalityin MLM company compensation systems (#2,above), extreme horizontal inequality (EHI) is seenin payout to the entire network of distributors, withemphasis on the word extreme —as opposed toordinary horizontal inequality in businessgenerally.

This translates into huge incomes for the topdistributors and little or no net income for the

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bottom 99% of distributors (with emphasis on netincome after all expenses—usually losses aftersubtracting product purchases). A few do get rich, butonly at the expense of hundreds or even thousandswho lose the time and money they have invested.

The reason for this EHI is that upline distributorsseveral levels up get about as much per sale as theseller of the products (due to RVE in commissionstructure), creating extraordinary leverage for thehighest levels in the upline. It also means thatdistributors get so little income from actual sales thatthey must recruit a downline to make any money at all.

20. Very small rewards are paid to distributors bythe company for retailing the products.

This is due to RVE, leading of necessity to anemphasis on recruiting in order to build volume andreceive large overrides on the business of one’sdownline. After all, the pieces of a pie cannot exceed100% of the pie. If upline distributors each get asizable chunk of the total price of the product, thatlimits the amount that can be allowed for theperson selling the product. So the only way to makemoney with most MLM’s is to get overrides from avery large group of downline distributors.

Commissions paid by the company for selling itsproducts are seldom enough to provide even aminimum wage for a distributor’s efforts. And pricesare usually too high to sell competitively at suggestedretail prices.

Sometimes the rewards paid by the MLMcompany are as much as hundreds or even thousandsof times greater for recruiting a downline as forretailing products. As a result, a common complaint ofpersons approached to do MLM is “She barelymentioned the product—it was only incidental to the‘opportunity’ for which she was recruiting.”

21. Net profits from MLM participation are rarelysufficient to be reported by distributors to the IRS.

The acid test for success as a MLM distributoris whether or not significant profits remain after allexpenses and product purchases from the company(which would not have been purchased had the personnot been a distributor) were accounted for—enoughto actually report a profit on their income taxes.Few do.

While failure in other small businesses iscommon, the majority either quit the business if theydon’t achieve profits for their efforts and investment—or move on to something else. But in MLM, manycontinue losing money for years (supported by their“day job” or by savings or retirement), goaded on bytheir upline and promised they will soon realize theirdream if they are patient and persistent.

Based on data furnished by the Nevada StateGaming Control Board 19, I estimate that the odds ofwinning at any of the gaming tables in Las Vegas isgreater than the likelihood of profiting from mostMLM programs—and without squandering time,effort, and relationships.

22. MLM distributors are led to believe that if theywill only “be patient and work harder,” they canall eventually succeed financially.

Success motivation and training in salesmanshipand recruitment techniques are often an important partof distributor conventions and retreats. This is oftenrepeated, in spite of the reality that the vast majoritywill lose the time and money they have invested. Thelatter point is never mentioned—a big deception.

So when MLM distributors “fail”, it is typical forthem to conclude that it was their fault—no matterhow hard they tried.

23. The company’s program is often touted as “theright vehicle for making money.”

Different types of MLM compensation systems(unilevel, binary, stairstep/breakaway, matrix, etc.) aremanifested in different shapes of pyramids. Creativenew MLM schemes are continually being developed,leaving a bewildering array of MLM programs tochoose from— but all following a similar multi-levelpyramid concept. And the effects discussed aboveseem to apply to all MLM’s in varying degrees.

“Legitimate products”—MLM promoters’justification before the regulators

24. Products are promoted through MLM that areunique, emotionally appealing, and consumable orrenewable—to perpetuate the pyramid.

MLM products have been characterized as“notions, potions, and lotions.” For example, personalcare and nutritional products have for years been thestaples for MLM companies. More recently, MLMfounders have promoted telecommunications (longdistance), internet services, or other new technologies,which in the public mind represent almost unlimited—even magical—opportunities for growth.

“Intangibles,” such as investments, buying clubs,and travel opportunities have also been promotedthrough MLM companies because they are renewableand allow for repeat business.

25. Products are sold that are pricey and difficult tocompare with alternative outlets, such as retailstores.

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Suppose a box of apples sells for $15 at thesupermarket. A MLM company sells comparableapples for $35. The promotional line is that “Theseapples are bright red with green stripes, making themmore valuable.” While some consumers may buy this“added value” argument, It could also be argued thatthe consumer is paying a premium of $20 for theseunusual apples. The premium amount in excess of acompetitive price could be considered the pyramidportion of the price, which accrues to the top of thehierarchy in typical pyramid fashion. This allowsthe MLM company to conduct a pyramid schemewithout arousing the suspicion of enforcementagencies—because “legitimate products” are offered.

The producer of vitamins for several MLMcompanies shared some interesting information withme. He was producing multiple vitamins at a cost of$3 to $4 a bottle, which were then sold throughdistributors under varying names by the MLMcompanies’ distributors. Each of the companiesassigned a wholesale price to the product of about $50a bottle. This producer suggested to executives fromthe MLM companies that they offer a superior productwith higher quality ingredients which he couldproduce for $7 a bottle. None of the MLM companieswere interested—not enough margin.

So in a PPS, the company pays the contributionto the pyramid for distributors out of productpurchases—as opposed to a naked pyramid scheme inwhich participants make direct cash payments into thepyramid. One is as pyramidal as the other, but MLMcompanies cleverly—and very successfully—avoidregulatory action by playing the pyramid game by thedefinitional rules implied by statutes or as interpretedby enforcement agencies.

26. New MLM distributors are encouraged to buymore frequently and in larger volumes than wouldbe seen as normal in other settings.

In MLM meetings, distributors are taught to “bea product of the products,” to be an example to one’sdownline, and (unspoken) to enrich the upline. Solarge purchases are often made for personalconsumption, as well as for others in one’s downlineand for gifts or samples—to reach volume quotasnecessary to qualify for higher levels in the distributorhierarchy. It is a common practice for friends andrelatives to be set up as “dummy distributors” to meetminimum qualifications for sales volume and numberof distributors. As a result, purchases of products overa year’s time by serious distributors may totalhundreds or even thousands of dollars.

One distributor who was held up as an examplewithin an MLM company spoke at a distributor rally Iattended. She boasted of spending over $700 a month

on personal care products and nutritional supplementsfor her family—and encouraged all her downline to dothe same.

These large purchases constitute a de facto entryfee, especially for products with an inherent pyramidpremium built into their prices. Though the statedentry fee for distributors may be minimal or non-existent, the aggregate total over a period of one ormore years for the pyramid portion of productpurchases typically far exceeds the entry fee formost illegal pyramid schemes. This is a factor oftenleft out of the analyses of investigators fromenforcement agencies.

The promotion of repeat purchases to qualify forever higher bonuses and levels in the hierarchy is alsoa powerful vehicle for moving overpriced products.Total purchases over a year or more often totalsthousands of dollars, very little of which is actuallysold at retail. It is another device for getting aroundanti-pyramid laws.

While many of these products are legitimate andeven of excellent quality, distributors typicallydiscontinue purchasing most of these products whenthey quit the system—or they find more reasonablypriced products that are similar.

It is also not unusual for distributors who quit agiven MLM program (which most do) to be left with agarage or basement full of unsold MLM inventory.Excessive stockpiling may be forbidden by a companyor in decrees by enforcement agencies, but such rulesare frequently ignored because rewards are paid forvolume, not compliance.

MLM negative lifestyle observations

27. MLM promoters engage in extensive deceptionand self-deception—probably more so than withany other distribution system.

Much of the deception is unwitting self-deception. The true believers in MLM are convincedthey are doing the right thing for themselves and thosethey recruit. Like the findings of the psychologist LeonFestinger on cognitive dissonance, they cannot allowthemselves to see the disparity between the “excitingopportunity” they believe they are promoting and thereality of likely loss—sometimes significant losses—for the vast majority of those they recruit. So theyresolve the dissonance by convincing themselves thatthe opportunity is legitimate.

My observation is that to be successful in mostMLM’s, a person must first be deceived, maintainhis/her own self-deception, then deceive recruitsand downline en masse. In the typical MLMcompany, greed and the desire for time freedom

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are primary motivators of serious participants;mystique, uniqueness, and consumability thenecessary ingredients in the products; anddeception and duplication the mechanism forgrowth of the pyramid.

28. An addictive trait appears in some MLMdistributors, much akin to compulsive gambling.

Some distributors will pay tremendous prices fortheir MLM participation, resulting in loss of income,homes, and other assets; consumer debt (borrowingagainst homes and maxing out credit cards) andbankruptcy; broken homes; and ruined lives. (See theexample of the MLM junkie on page 7.)

Using the above criteria, one can see that mostif not all MLM programs display a strong pyramidsyndrome—certainly enough to be labeled apyramid scheme, regardless of the legal definition. Iam reminded of the old adage, “If it looks like aduck, quacks like a duck, and waddles like a duck,it’s a duck.”

CHARACTERISTICS OF MOREACCEPTABLE NON-PPS MARKETINGORGANIZATIONS

Now to help sharpen our discernment betweeninherently PPS and non-PPS organizations, let’s lookat the characteristics of more acceptable salesopportunities and product distribution systems that donot display the symptoms of a pyramid syndrome:

1. You seldom see more than four levels in thedistribution hierarchy.

If only for the sake of efficiency, successful salesorganizations seldom have more levels than salesperson, district manager, regional manager, andnational sales manager or vice-president.

2. Advancement through management levels—andcorresponding pay—is limited, with no promise ofunlimited opportunities for pay and advancement. Sales managers and higher executives are usuallyappointed, rather than automatically rising to newlevels on the basis of recruiting success, as is the casewith PPS’s.

3. The portion of the retail price received by retailsellers is far greater than that received bywholesalers, manufacturer’s rep’s, or salesmanagers two or three levels above them. In directsales organizations, the same holds true.

Horizontal equality or equity is actuallyachieved by vertical inequality in a fair breakdownof compensation (or in the case of the retailmarket— markup in prices) based on directcontribution to the sale, with the person actuallydoing the selling receiving far greater remunerationper sale than the person one level (or even severallevels) above him/her.

For example, in a typical retail setting such as abookstore, the retailer may receive 40% of the price ofthe book (out of which also comes hired help,advertising, and store front costs), while thewholesaler may receive 15% (the lower commissionoffset by larger volume).

In a typical direct sales organization (sellingcookware, encyclopedias, etc.), the sales person mayget from 20-40%, while the district manager abovehim/her may get only 10 or 15%, the regionalmanager 5%, and the national manager perhaps a 1 or2% bonus in addition to a salary. So the primaryincentive of the person closest to the consumer is tosell, not recruit.

4. Seldom are promises made for “residual” or“leveraged” income—or other magical money-making formula.

Of course, there are exceptions, such as sales ofinsurance or investments. But the emphasis is notmerely on passive money-making, in which income isgenerated by some magical pyramid-like money-making formula.

5. When it occurs, growth is relatively persistentand steady and somewhat proportional to quality ofthe products and to marketing skill and effort.

With the possible exception of some high-techbusiness startups, explosive pyramidal growth isseldom seen in a normal business setting.

6. Not only do participants not see their business asa pyramid scheme, but also others outside theorganization do not perceive it as such.

Again, give the general public some credit. Ask asample of consumers if the companies they routinelydeal with are pyramid schemes, and the answer willalmost always be “no.” Many in my telephone surveysanswered quite differently when asked for theirperceptions of MLM. “MLM is a pyramid scheme,regardless of what anyone says,” was a typicalresponse.

7. A clear distinction is made between the consumerand the person selling the product.

Seldom is a buyer of books or furniture, forexample, asked to become a seller of the same.

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8. Emphasis is on products and services, notrecruiting.

Products are sold for their intrinsic value, not asa vehicle to build a profitable downline. As mentionedearlier, recruiting is not even mentioned in most non-MLM sales situations.

9. A respectable percentage of sales personssucceed (in most established non-PPS salessituations), with a probable dropout rate of wellunder 75% over a period of two years.

10. Mass recruiting or opportunity meetings areseldom needed. Hiring is done one-on-one or in small groups,with some emphasis on needs and qualifications ofrecruits—though some direct sales opportunities arean exception.

11. Sales volume is built up by repeat business fromsatisfactory service, rather than being dependenton duplication of one’s efforts through a multitudeof distributors.

12. Generally, enduring demand is market-driven.Products are sold for every need—primarily

based on customer demand. This is in sharp contrast todistributor-driven demand for MLM products—whichrequire uniqueness, emotional appeal, andconsumability, along with extensive margin to supporta large network of distributors.

13. An equitable payout system is characterized byrelative horizontal equality in which totalremuneration (including salary, commissions, andbonuses) is shared at least somewhat fairly amongall participants, based on their value andcontributions to the organization.

Few if any lose money. And for paid workers inorganizations, a minimum wage is guaranteed—atleast in the U.S. Contrast this with typical PPSprograms in which over 90% (over 99% in somecases) lose money, after subtracting all expenses andproduct purchases.

14. It is possible for the person doing the selling toearn a comfortable living without having to do anyrecruiting.

Prices are competitive enough to make retailingfeasible, and the commissions sufficient to makeretailing financially rewarding.

15. Territorial protection is granted to preventmarket saturation, especially in franchises.

In normal business situations, even competitorsusually spread themselves out to prevent saturation ofa given market.

16. Seldom are promises made for huge sums inmonetary compensation, even for top distributors.

Promises to newcomers of huge income potential(over $50,000 a month, for example) in other settingswould rouse suspicion of illegal dealings of some kind.

Another old adage applies here: “If it sounds toogood to be true, it probably is.”

17. Patience and hard work actually pay off formore than just a few persons.

With the exception of illegal sweat shops, mostincome producing activities lead to some acceptablereturn for a person’s time. Even small businessesowners can hold out profitless in the hope of futuregain for only so long. The majority of business personsshow at least a net profit within a reasonable period oftime—or they will move on to something else.

18. Sales persons and distributors for a givenmanufacturer are provided sales materials andtraining free of charge.

Usually, the last thing a sales department of amajor manufacturer wants is for those who sell thecompany’s products to feel they have to pay to learn tosell their offerings. If a sales person must pay for aconference, it is usually industry wide or for specificneeds of interest to many attendees.

19. Products are competitively priced, andcomparison shopping for competitive products isfeasible.

20. Products are purchased as needed, notstockpiled to meet quotas to qualify for ever-highercommission levels.

21. While deception is found in many salessituations, success is not dependent on deception asan essential ingredient.

Retailers in more standard settings are notrewarded for deceit to the extent that is the case forPPS’s, where telling the truth will not get a distributorto the top levels—where the money is.

22. There are little or no addictive attractions to thecompensation system—at least not to the extremesfound in MLM.

The more normal expectation is for workers to becompensated for the work they do or for what theycontribute to a business or other organization.

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By comparing the above characteristics withthe foregoing characteristics of an MLM pyramidsyndrome, the difference becomes obvious—evenstark.

HOW TO DEVELOP A PYRAMID SCHEMETHAT IS VERY PROFITABLE FOR THEFOUNDERS—AND GET AWAY WITH IT

Given the current regulatory environment, it isinteresting to see what a person motivated to constructand profit from a pyramid scheme might do. Onecould very deliberately accomplish this and might evenget away with it in most states by following thesesteps:

1. Decide on a compensation system (binary,breakaway, matrix, etc.) that would operate in pyramidfashion using products as a vehicle for getting peopleto pay into the pyramid. Offer a complex system ofincentives for making it to higher and higher levelsthrough intense leveraging, with a distributor four orfive levels up getting as much or more per sale fromthe company as the person making the sale [using theinnocent appearing vertical equality model common toMLM’s]. Everyone will recruit like crazy to get to thetop level. [Beautiful!]

2. Develop or hire someone to develop a productthat has emotional or mystical appeal, is too unique tobe compared with something that could be purchasedat retail outlets, and is highly consumable.

For simplicity, hire a qualified nutritionist orherbalist to search the scientific journals for somenewly-discovered substance that has been shown tohelp prevent cancer, minimize heart disease, slowaging, enhance sexual function, and/or stimulateenergy and brain cells. It is best if this substancecomes from some exotic rain forest or other remotelocation.

Then combine this exotic substance with someproven ingredients found to be effective for combatingcertain ills and arrange to have it manufactured by anyof a number of companies that do this routinely. Makecertain it is unique enough that it cannot be comparedwith existing off-the-shelf products.

3. Give your program a name that has a ring ofsuccess attached to it, such as “Wealth Plus.” Thengive your product a magic sounding name—say“WP++.”

4. Price all of the variations of the product at aprice that allows plenty of margin to support thedistributor network that will sell it, with a nice marginfor your firm. [This margin would be large enough

that it could be considered the pyramid contributionto your pyramid scheme. But don’t tell anybody.]

Since the product cannot be compared exactlywith any existing product, you may produce it for $3or $4, for example, and list it for sale to consumers for$75. Of course, your distributors would be able to buyit wholesale for about $50.

[What a great way to fool the regulators!Distributors may actually be paying $25 a month fromthe pyramid portion of the price—or large multiplesof that amount— into the pyramid, but because of the“legitimate product” disguise, this can be done overand over ad infinitum without detection and appearperfectly legal, except to the more astuteenforcement agency officials.]

5. Prepare literature touting your formulation asone of the greatest advances in nutrition, and offer itin conjunction with a compensation system that is“truly a revolutionary money-making program,” onedestined to make those persons who “get in on theground floor” an obscene amount of money—in amatter of weeks.

6. Set up your compensation plan so as to createthe illusion for distributors that they can achievesuccess, though the bulk of the money will accrue toyou and a few top distributors. Hire a statistician tohide the numbers so that new recruits and enforcementagencies will not realize that this “great opportunity”is will be profitable primarily to you and yourfounding distributors at the top of the pyramid.20 (rep)

7. Set up minimum purchase requirements andvolume incentives to qualify for progression intoascending distributor payout levels. Make thesevolume requirements high enough that distributorswill be on a continual treadmill trying to achieve that“next level.”

8. Put together a starter kit of sales materials, andenough products to get started. But check out localstate laws regarding pyramid schemes to make certainthe charge for the kit and products fall within what islegally acceptable.

[This is not hard to do. The “legitimate product”rule and other restrictions are easy to get around. Agood attorney will keep you out of hot water, whileyou conduct your pyramid scheme.]

9. Begin selling this pre-launch “ground-flooropportunity” to MLM enthusiasts and through MLMpublications, announcing a launch date when all whoenter can expect to prosper beyond their wildestdreams. Set up a web page and promote it heavily tothose seeking an inside track on a “pre-launchopportunity.”

10. Train the founding distributors in how torecruit, advertise, hold opportunity meetings, etc.Pump them up with promises of huge paychecks soon

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to come. They will even pay to attend weekend retreatsand “sales training” programs [actually recruitingprograms]—and for tapes, books, company T-shirts,web sites, and all the other programs andparaphernalia that will help them to be “successful.”

11. Build your infrastructure as you go,developing new products and geographical divisions asneeded to continue the illusion of a “ground-flooropportunity.”

[If the “first wave” is successful—you can takeyour money and run as soon as perceived saturationcauses sales to level off. Spend your money or shelterit in offshore accounts so that if regulators catch upwith you the fines you actually pay will be but a dropin the bucket compared to the take you have setaside.]

12. Since the money will flow in bountifully, youmay choose to stick around. If so, spend some of yourabundant supply of money supporting the politicalparty in power. Donate to the campaigns of all likelycandidates for Attorney General, regardless of party.

13. Donate to university scholarship funds andpopular local charities, making certain that timelypress releases accompany all such giving. Supportlocal athletic programs, with priority to highly visiblescoreboards and other showy paraphernalia.

[Enforcement agencies will not get popularsupport for going after an MLM that is doing so manygood things, if your largesse is well-placed and verynoticeable.]

FRONT END OR MIDDLE WEIGHTEDSYSTEMS—MORE EQUITABLE?

Could an MLM be operated in a fashion that doesnot lead to the usual effects of a pyramid scheme (EHIand emphasis on recruiting)? Perhaps, but it isunlikely, since the changes necessary to make it a fairsystem would make it no longer recognizable as anMLM.

For example, with front end weighted systems,distributors are paid enough to sell the product thatthey do not need to recruit to be successful. In thesecases, the program may be limited to 3 or 4 levels, andthe vertical payout ratio is decreasing to, for example,2:1 between each successive level, so that the personsselling the product gets 30% from the company, theperson above him/her gets 15%, then 7½, then 3-¾%,etc.

With such a compensation system, the distributordoing the selling may earn as much total income as aperson three or four levels up— without recruiting.The sales managers or upline distributors make lessper sale, but make money on volume with many

downline distributors. So it works out more equitablythan a back end weighted system.

Of course, if there is little incentive to recruit, thenetwork does not expand and will eventually die ifonly because of attrition. Also, no one makes anobscene amount of money with front end weightedsystems, so avaricious and ambitious MLM personsare not attracted to them. Greed and deception areminimized in such a system, which tends to discourageparticipation by those with a pyramidal mentality.Consequently, front end weighted MLM systems havea tendency to quickly fade away and disappear.

Other MLM companies are experimenting withmiddle weighted plans in which the payout per sale islarger for those distributors two to four levels up in thehierarchy than for front line distributors or thosefurther upline. Since there is just enough incentive tomake it worthwhile to recruit one or two levels, thenetwork can continue to grow. Therefore, thesesystems may have a greater likelihood of survival.21

However, any program that requires recruiting inorder for distributors to succeed could be considered aPPS. It would be better if we stick to the guideline thata person should not be required to recruit a singleperson to earn a good return for his or her time.

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CONCLUSIONS

When MLM programs are observed over longperiods of time, pyramidal concepts, motivation, andeffects become as evident as with any other pyramidscheme. But by using legitimate products to escape thedefinition of an illegal pyramid scheme, the majorMLM companies have become far more pervasive andpowerful in their effects than any illegal pyramidscheme ever was.

Though a MLM company may have little or noentry fee, the purchases of products over a year’s timeby a given distributor may total hundreds or eventhousands of dollars, of which 20-40% may be apyramid premium—dwarfing in the aggregate mostparticipation fees for naked pyramid schemes. Whenthe pyramid premium portion of these overpricedpurchases are combined over an entire distributionnetwork, the amount of contribution to the MLMcompany and its top distributors is huge.

Coupled with high priced products arecompensation systems that are highly leveraged, as istrue in any pyramid scheme. Three distinguishingcharacteristics are given for identifying PPS’s:

1. A chaining hierarchy of levels ofdistributors— more than is functionally justified—is recruited without area limits, which leads toextreme leverage and perceived saturation in themarketplace.

2. Relative vertical equality (RVE) indistributor compensation leads to an emphasis onrecruiting and to extreme horizontal inequality(EHI) over the entire network of distributors.

3. Significant purchase or recruiting quotasare required (or incentives offered) to qualify forincreasing bonus levels or purchasing discounts inan ascending hierarchy of payout levels. This isreferred to as the “pay to play” feature.

The cost to consumers nationwide of pyramidpremiums built into PPS’s could easily total billions ofdollars annuallyA1. I would not be surprised to learnthat the aggregate losses to participants in PPS’s(MLM schemes) greatly exceeds the sum total of allillegal pyramid schemes combined—by a factor of asmuch as 100 to one. And all over a definition.

I maintain that PPS’s constitute quadruplepyramids—schemes requiring continual investmentof time, effort, money, and relationships, all ofwhich work together in typical pyramid fashion.Naked pyramids in which a modest investment isrequired are much less costly to participants over time,because they are easily identified and quickly quashedby enforcement agencies.

What is missing in interpretive guidelines usedin enforcement of laws against pyramid schemes

are objective and proactive methods ofdistinguishing between emphasis on recruitingversus retailing of products and services. The toolsdiscussed here for accomplishing this could bevalidated using the following procedures:

1. Undercover observation (similar to what I havedone) would help to understand subtle dynamicsotherwise hard to discern.

2. Interviews with ex-distributors (which havebeen extremely helpful to me in my analyses) wouldyield more honest responses than current distributorsfor the reasons mentioned above.

3. Requirements for MLM companies to revealpayout distribution by percentiles, along withproduct purchases by the same groups of distributorsby percentiles—which I can only request, but agovernment agency could require. (See Appendix B.)RVE-EHI, would become evident, especially whenplotted graphically, as in Table 1.

4. Mathematical analysis of the compensationsystem to reveal rewards emphasizing recruiting, asopposed to retailing. (An analyst with a good mathbackground would be crucial for this.) Payout from thecompany, not assumed retail markup, should be thedetermining factor. Even if products were pricedcompetitively, when extraordinary rewards are offeredfor recruiting—often highly leveraged, the incentive toretail products may be insignificant in comparison.

5. Syndrome analysis, using symptoms such asthose outlined in this report, would serve to confirmpyramidal behavior for MLM’s that are in fact PPS’s.

Personally, I have nothing against most of thepeople who are active in MLM’s. In fact, some veryrespectable people get involved—as was the case withsome of the early pyramid schemes.

Many of the executives and founding distributorsof MLM companies are unaware of the pyramidaleffects of their enterprises and claim to be persons ofintegrity who would never do anything to defraud orhurt anyone. But what few of them want to accept isthe fact that if they are not deliberately deceivingothers, they are deceiving themselves.

Also, the products are often of high quality.MLM programs are usually not set up to intentionallydefraud, as is often the case with naked pyramid orPonzi schemes. PPS’s are much more subtle—evenseductive—and sometimes widely accepted. Butfeeding quality products through a multi-levelnetwork of distributors does not make an MLMprogram any less pyramidal in its effects than anyother pyramid scheme, whether or not it isadjudged to be an illegal pyramid scheme.

In my view, the true villains in most MLM’sare the pyramidal compensation systems,demonstrating the characteristics discussed above.

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It appears evident that most of the problems withMLM programs stem from these highly leveragedcompensation systems. One prevalent effect of such(RVE) systems is the extreme payout to topdistributors made possible by the investments of alarge group of downline distributors, the vast majorityof whom lose money after subtracting productpurchases and operating expenses.

All of the MLM programs I have seen display afairly obvious pyramid syndrome. But the wordscheme is a word consumers understand, so I suggestthat the PPS designation be used with all MLMcompanies which demonstrate a pyramid syndrome.So for classification purposes you would haveproduct-based pyramid schemes (PPS’s) and nakedpyramid schemes. While it might be possible for anMLM to fall outside of either of these two categories,it would be rare if it were possible at all.

The situation today in the MLM industry is oneof significant growth over the past decade. Numerousbooks are appearing on how to get rich via MLM.Discussion of MLM opportunities has become arespectable topic even in some of the business press,such as Success Magazine and other “opportunity”magazines. Even some business schools see MLM as aviable business model.

But one of the most disturbing aspects of theindustry is its success in convincing enforcementagencies that they are not pyramid schemes and incommunicating the same to the public. Many attemptsto regulate the MLM industry through legislation havenot been effective. Some state laws just create work forattorneys meeting cumbersome registrationrequirements—which, when satisfied, are then used byMLM promoters as an endorsement of their programas having “a clean bill of health.”

None of the states require adequate revelation ofpayout distribution by percentiles. Were MLMpromoters required to make such statistics available inlarge print to people they recruit, consumers could atleast have the information needed to make aninformed decision regarding participation.

A more proactive approach to legislation andenforcement would be in the best interest ofconsumers. This could be accomplished by requiringsubmission of the compensation and marketing systemof a new MLM for analysis before commencingoperations. Using the tools discussed here, adetermination could be made on whether or not it wasa pyramid scheme (PPS). Many PPS programs couldthereby be stopped even before they begin operations.

Front end weighted MLM’s, in whichdistributors on the first level are rewarded enough incommissions that they do not need to recruit adownline to earn a good income, are a more equitable

system. However, few if any front end weightedprograms survive, as examples cannot be found ofupline distributors striking it rich—to act as arecruiting incentive.

MLM is now the most common form of PPS’s.Creative new versions will likely spring up as longas people are looking for an easy buck. Let us hopeenforcement agencies and consumers are able to seethrough the deceptions that underlie every newpyramid scheme, whether naked or product-based.

RECOMMENDATIONS

What can be done to improve the oversight andregulation of the MLM industry? Well, I believe as ineverything else, there is the ideal and the reality. Anideal program of action might include the following:

1. Limit the number of hierarchical levels inMLM compensation programs to about four levels.

2. Prohibit the RVE which characterizes mostpyramid schemes, so that distributors several levelsabove the person selling the product do not profit asmuch per sale as the person actually doing theselling—unless they had something to do with thesale. (In some states the practice of upline overrideswithout direct contribution to sales is illegal, butseldom enforced.)

3. Require that all MLM companies make publica complete breakdown by percentiles of the payoutdistribution for all distributors in the network. Theodds of winning a sweepstakes must be included inpromotional mailings. Considering the slim odds ofsuccess in MLM, MLM programs should have asimilar requirement. But I believe such a cleardisclosure of meaningful statistics should be furnishedto prospects in large, bold print on a sheet of paper byitself—not buried in a prospectus package.

Severe penalties should be exacted of bothdistributors and sponsoring MLM companies for notreleasing such information to prospects in a clear andunmistakable format.

In some states, MLM recruiters are currentlyrequired to support income claims, but statisticalreporting methods that cleverly disguise the odds ofsuccess should not be allowed. 20 (rep)

Some agencies only act on complaints.Consumers seldom complain because MLM promotersdrum into recruits the concept that failure is due tolack of effort or skill on the part of participants, andnot the typical result of its compensation system. Withmore accurate information, consumers could bereassured that the failure may not have been their

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fault, but in very many cases their “failure” contributesto the “success” of a system that was designed tobenefit only a few.

Legislation should be passed which not onlyspells out to MLM companies what they cannot do,but what they must do—steps with which they mustcomply in every recruiting situation, or face sanctionsfor non-compliance. Examples would be notifying allrecruits of the odds of success, based on commissionspaid by the company to percentiles of all distributors.

Also, it would be wise to take a more proactiveapproach by requiring MLM’s to submit a copy oftheir compensation system in advance of commencingbusiness. Highly leveraged systems that rewardrecruiting much more than retailing could beprohibited as pyramid schemes (PPS’s).

4. Enforcement agencies should stopsuggesting or implying that most MLM companiesare not pyramid schemes simply because they arenot naked pyramid schemes—using some existingstatutory criteria or precedents of weak regulatoryaction. Based on the foregoing analysis, a non-pyramidal MLM program would be extremely rare.

I am not saying all MLM programs are illegaland should be prosecuted as pyramid schemes. Butjudicious application of the tools explained here couldhelp in identifying the most objectionable of PPS’s.

Realistically, I do not expect all of the aboverecommendations to be accepted or implemented. Insome ways, the MLM industry is like the tobaccoindustry. Legislatures and regulators now recognizetobacco is harmful, but the industry and consumptionhabits of the American public are too ingrained tooutlaw it. So the focus is now on truth in advertisingand on removing the deception that tobacco is notharmful or addictive.

As with tobacco, enforcement agencies could atthe very least avoid perpetuating commonly helddeceptions regarding MLM; viz., that it is not apyramid scheme simply because some MLM’s are notinterpreted to fall within the definition of an illegalpyramid scheme. This should be reflected in allhandouts from the FTC (as well as on the FTC Website) and in information released by state consumerprotection agencies. For example, “Think pyramidsand multi-level marketing plans are the same? Thinkagain.”22 could be changed to “Virtually all MLM’stoday, though not as yet adjudged as illegal pyramidschemes, are organized pyramid ally and may createsimilar effects.” Care should be exercised insuggesting that MLM programs are not pyramidschemes.

Consumers could also be given betterguidelines in what to look for if they want to pursuean MLM program. For example, the author has

written a flyer entitled Twelve Tests for Evaluating aNetwork Marketing (MLM)“Opportunity,” whichfeatures a much more rigorous set of guidelines thanthose used by the FTC and the BBB. (Appendix C.)

FINAL COMMENT

If you have found this report helpful inevaluating one of the most controversial of businesspractices— network marketing—you would be doingyour associates a favor by sharing this informationwith at least five of them. Then ask each of them toshare it with five more interested persons, and suggestthey tell each of them to share it with five more . . .

NOTES

Abstract references and notes:A1. Will Marks, Multi-level Marketing: the Definitive Guide to

America’s Top MLM Companies (Arlington, Texas: TheSummit Publishing Group), p. 4. Also Leonard W. Clements,Inside Network Marketing (Rocklin, California: PrimaPublishing), p. 4—and Richard Poe, Wave 3: The New Era inNetwork Marketing (Rocklin, California: Prima Publishing), p.xiii and xiv. In these and other references from sources familiarwith the MLM industry, estimates of at least 5 to 7 milliondistributors selling at least $12-15 billion annually in MLMproducts seems a safe estimate of the size of the industry. Theportion of that amount that is siphoned off each year fromunwitting participants to top upline distributors and companyfounders would be hard to measure, but based on the analysis inthis paper it most probably is quite substantial—at least in thebillions of dollars.

A2. FTC Consumer Alert, December 1996

Text references:1. FTC vs. Future net, Inc. Civil No. 98-1113 GHK (Bar)2. FTC Consumer Alert, December 19963. “Pyramid Schemes,” Div. of Consumer Protection, State of Utah—similar to definitions used in other states4. Merriam Webster’s Collegiate Dictionary, Tenth Edition5. & 6. Ibid.7 Joseph Bullgatz , Ponzi Schemes, Invaders from Mars, and MoreExtraordinary Popular Delusions (New York: Harmony Books,1992), p. 36.8. & 9. Ibid, p. 42-310. In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975),gaff’s mem, sub nom. Turner v. FTC 580 F .2d 701 (D.C. Cir. 1978).11. Published by Prima Publishing, Rocklin, CA, 199512. Michael P. Harden, Ph.D., Handbook of Multi-level Marketing(Carrollton, Texas: Promontory Publishing: 1987), p. 29.13. Jon M. Taylor, Ph. D., The Network Marketing Game (Kaysville,Utah: King Alfred Press, 1997), p. 100.14. Mailed in the spring of 1999.15. Bruce Craig, Petition to Robert Pitofsky, Chairman of the FTC, forcompliance analysis or enforcement review regarding Amway, 93 FTC618 (1979), Docket 902316. Special report by Jon M. Taylor, NuSkin’s Naughty Numbers,Consumer Awareness Institute, August 7, 200017. Merriam Webster’s Collegiate Dictionary, Tenth Edition18. Discussion with Leonard W. Clements, founder of MarketWave,July 13, 1999.19. Michael P. Hardin, Handbook of Multi-level Marketing, p. 127.

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18. Taylor, The Network Marketing Game, pp. 149-150 (ConsumerAwareness Institute survey conducted of 100 persons approached toparticipate in MLM programs, 1997).19. Nevada State Gaming Control Bd. statistics dated May 6, 199820. Special report by Jon M. Taylor, NuSkin’s Naughty Numbers,Consumer Awareness Institute, August 7, 2000

21. Telephone conversation with Leonard W. Clements, founder ofMarketWave, July 13, 1999.22. FTC Consumer Alert, December 1996 (FTC web page).

For recommended web sites, see Appendix D

Appendix A

MY UNIQUE BACKGROUND AND EXPERIENCEWITH NETWORK MARKETING (MLM)

Anyone reading this report might see this as arather brash expose against an established industryand relevant regulators. My motives and mycredentials which qualify me to make such claimsdeserve scrutiny. What follows is my relevantbackground and what I went through in researchingthis report for the benefit of consumers, legislators,and regulators.

First, my educational credentials include anMBA degree from Brigham Young University in 1965and a Ph.D. in Applied Psychology from theUniversity of Utah in 1986. An inveterate entrepreneurand communicator, I have over 30 years of sales,marketing, and entrepreneurial experience, havingpersonally started or assisted in the creation of over 40businesses.

I have worked on the administrative staff of andperformed research for two universities and havetaught adjunct college classes in businessmanagement, entrepreneurship, personal finance,communications, and business ethics. I have alsotraveled the country teaching business-relatedseminars and have sponsored income opportunityevents, as well as educational programs for businessesand consumers. Also, I have written and published onnumerous consumer and business topics.

In the past, whenever asked to express myopinion on MLM, I openly shared my opinion thatthey were in fact pyramid schemes in which only a fewmade money at the expense of many who came awayempty.

My outlook changed when in 1994 and 1995 Iwas approached by influential friends who insisted Iwas wrong and should take a more objective look atthe MLM industry. They provided me with muchinformation for my review.

Being both an entrepreneur by nature and aresearcher by training and experience, I wascurious and considered proving for myself once andfor all whether or not MLM was a legitimatebusiness—by trying it myself. I would test MLM inthe crucible of personal experience. Then I would

tell the world the truth, whatever I discovered—positive or negative.

As a first step, I went straight to Utah’s Divisionof Consumer Protection and was furnished a pamphletpublished by the Direct Selling Education Foundation(which I have since learned was a cover for the DirectSelling Association, which is financed primarily by theMLM industry and represented heavily in itsmembership) entitled “Pyramid Schemes: Not WhatThey Seem!” It made the case for multi-levelmarketing programs as legitimate incomeopportunities. I was reassured when I noticed it was“prepared in cooperation with the Federal TradeCommission, Washington, D.C.”

Then, like a good investigating consumer, Ichecked with the Better Business Bureau. Theysupplied me with a BBB flyer entitled “Tips on . . .Multi-level Marketing (How to Tell a LegitimateOpportunity from a Pyramid Scheme.)” Again, themessage was similar—reputable MLM’s weredistinguished from illegal pyramid schemes, prettymuch following the information released by the FTC.Guidelines and checklists were given, but most anyMLM program could pass, as long as products andservices were offered—in lieu of recruiting people topay fees for the right to sell products.

[In retrospect, I have to say that I and no doubtmany others were let down by the very agencies thatshould have been protecting our interests asconsumers. One of the reasons I am donating my timeresearching and writing on this topic is that I feltcompelled to ask: “If one with my background andthoroughness in seeking information was so misled,what could be expected of someone without suchbackground?”]

Next, I read Richard Poe’s best-selling bookWave 3: the New Era in Network Marketing11. Havingserved on the editorial staff of Success Magazine, heseemed credible. I met him personally and learned thathe had never been a MLM distributor, but consideredhimself an objective reporter of the MLMphenomenon—and conveyed a favorable outlook forthe industry. That impressed me.

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I then read numerous articles on MLM and spokewith several MLM participants I knew and trusted, allof whom helped ease my concerns and even led me tosee that there was a tremendous future in this industryand that I should get on board.

I jumped in with both feet, dropping my otherbusiness interests and dedicating more than full timeto the enterprise. I carefully selected a company with asterling reputation (and several “millionaire”distributors on board) and excellent products.According to published income figures, the top level ofdistributors averaged over $700,000 a year. I figuredthat with my training, experience, contacts, anddetermination, I could succeed if anyone could.

I did everything my company and uplinerecommended—subscribed to and tried all theproducts, recruited many people I knew and soughtany referrals I could get, advertised extensively(especially when personal recruiting becameunproductive),attended all the training and opportunity meetings,used my best efforts to train and motivate my recruits,and drove my wife crazy with my single-mindeddedication to MLM recruiting. But my upline waspleased.

My wife began asking questions after a fewmonths of no income. She did not like the changesthat were occurring in me as a person—neglecting thefamily and seeing everyone as a prospect, even ourmost treasured friends and family members.Fortunately, as a researcher I had kept detailed notesof my experiences and observations with MLM andwas still in an investigative mode.

Periodically, I reviewed my financial progress—areality check of what was actually happening. At theend of the year I had financially fallen behind to asignificant degree, partly because of all the products Ihad purchased to maintain artificial qualifyingstandards (quotas) for ever-higher commission andbonus levels, partly because of all the other expensesof running the operation, and also because of my nothaving any alternative income during that time.

MLM promoters encouraged this dedication, buton seeing my setbacks my upline changed their tuneand told me that I should have kept my other workgoing. The problem was that I could see from theoutset that to be successful, such total dedication wasrequired. Also, I wanted to be in a position to speakfrom personal experience when I would eventuallywrite up my findings about MLM.

I was not alone in coming away empty from myparticipation. Others who joined the program when Idid also lost whatever time and money they hadinvested—including an attorney and persons with

solid records of sales and marketing success in othersettings.

Another facet of MLM fascinated me even morethan the money. I discovered a whole range of ethicalconflicts that for me—as a former teacher of ethicsand one who considers himself to be an honestperson—made MLM an unacceptable way ofconducting a business.

One major ethical problem was watching MLMpromoters exploit the social capital of participants forgain—and the resulting contamination of treasuredrelationships that may have taken a lifetime to build.

I finally concluded that deception and greed areprimary elements for the success of most MLMprograms. The reasons for this finding are outlined inthe foregoing report.

In fact, before I quit my program after about ayear of concentrated effort, though I had achieved“executive” status, I could see clearly what I wouldhave to do to earn sizable commissions (even the$700,000 a year others had achieved). I decided it wassimply not worth it. Why? Because I would have torecruit by deceiving hundreds, even thousands ofdownline distributors (like I had been deceived), intobelieving they too could achieve what I had achieved.

For me to receive that much money, thousandswould have to lose their investment, since the moneywould have to come from somewhere. It was truly abogus business opportunity.

Also, I would have to continue to insist thatMLM programs were not pyramid schemes (after all,the FTC and the BBB had implied in their informationpieces that they were not)—as long as legitimateproducts and services were sold and people were notmerely recruited to pay for sales rights.

Upon learning of my dissatisfaction, many otherMLM promoters tried to recruit me into theirprograms. But I felt my time and resources were toovaluable to learn everything by experience. Myprimary interest by this time was in presenting a goodoverview of the generic problems of MLM’s, whichled to extensive telephone surveys and other researchabout the pros and cons of this unique business model.Out of all this research came this and other analyticalpapers, a book and involvement in a consumerawareness movement focused on PPS’s.

Some critics of my analysis see my exposé onMLM resulting from a “sour grapes” attitude afterfailing at MLM. I can only respond that (1) I was not a“failure” since I rose to the top 1% of all distributorswho had tried this program, and (2) consumers may befortunate that (unlike millions of others who quitMLM with feelings of failure) I had the determinationto tell the truth and to publish what I have learned.This is because I was fulfilling my initial pledge to

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myself to make public whatever I learned from myresearch and experiences with MLM.

Others have asked why I have chosen to focus somuch of my energies and resources for a cause forwhich I will receive little or no gain. My answer is thatwhen I gain unique insights on an inequity or injusticein society, I feel a moral imperative to share what Iknow. This report is an effort to do so.

Also, I believe that these insights could nothave come about without a careful look from theinside of these organizations as a practicingdistributor. Had a government investigator with myunique background gone undercover as a MLMdistributor for a year or more, he/she would probablyhave come up with similar conclusions.

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Appendix BUnmet Challenge to Network Marketing (MLM) Industry Leaders:

Network Marketing Payout Distribution Study

The “Network Marketing Payout Distribution Study” includes:(1) the letter to the presidents of 60 of the most prominent network marketing companies (below)(2) conclusions about network marketing (MLM) the company presidents were invited to disprove, at

least for their companies(3) the forms which—if completed—would tend to prove or disprove such conclusions

CONSUMER AWARENESS INSTITUTE

Spring, 1999ATTN: ____________, PresidentCompanyAddress

Dear Mr./Ms. ___________:

For the past two years I have researched the field of network marketing (MLM—a.k.a. “MLM”)and have interviewed hundreds of people who had been involved in a wide variety of programs. Myresearch, while initially positive, uncovered more and more very unsettling problems with MLM.

When speaking on the subject of MLM to local groups I have received much feedback fromparticipants and critics of MLM. One tax accountant who was a principal of H&R Block in northernUtah stated that over the years he and his staff had prepared thousands of tax returns, and of the severalhundred of these who he knew had been involved in MLM, he could remember only one who had everreported a net profit on his return.

Though I already knew that the actual success stories were far less than one would be led to believefrom attending a typical MLM opportunity meeting, this tax man’s report was shocking to those of uswho heard it. So I called tax accountants and preparers in other areas to see if their experience was thesame. Each of them claimed similar experiences with their clients over the years. Others who work withpeoples’ money, such as certified financial planners, insurance underwriters, and bankers, have relayedsimilar feedback.

I will soon be publishing this information for the benefit of consumers, educators, legislators, andregulatory agencies who have an interest in this topic. The page that follows presents the essence of myconclusions, which unfortunately are not favorable for the MLM industry. So I felt it only fair to allowfor rebuttal from you and others who may have an interest in seeing a balanced treatment of the subject.So I am offering you that opportunity and the format for doing so.

Your assistance in gathering objective information will be greatly appreciated. I am not interestedin anecdotal material, which may be no more valid than stories of persons who won a lottery or asweepstakes. And vigorous arguments to the contrary will not help—I believe I’ve heard them all. Whatwill carry weight is data which breaks down the distribution of payouts to your distributors, extractedfrom your data base of distributors. The information you provide must be verifiable by independentaudit, as consumer protection agencies and legislators may choose to validate this material. Followingthis letter are instructions for providing the information.

You should be able to access this information readily from your database. However, if you prefernot to provide this information because it won’t reflect well on your program, I can certainly understandyour reluctance. But such refusal will be interpreted to be an answer in itself. I shall be looking forwardto your response.

Appreciatively,

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Jon M. Taylor, Ph.D.

NETWORK MARKETINGPAYOUT DISTRIBUTION STUDY

By Jon M. Taylor, Ph.D.

A. Network marketing has wide appeal.Network marketing (MLM–a.k.a. MLM) offers the

opportunity for an individual to conduct a business withouthaving to bother with expensive resources such as physicalplant or retail storefront, warehousing, employees,advertising, or other costs typically associated with runninga business.

With MLM, large (leveraged) incomes can beproduced by recruiting a downline (network) of multiplelayers of distributors upon which a distributor can drawcommissions and bonuses, the amount depending on thetype of compensation plan and the size and character ofone’s “downline.” Such an organization can be built fromone’s own home without the expenses and complicationstypically associated with other types of businesses.

MLM offers not only financial independence withminimal investment, but a level playing field in whichanyone can participate, regardless of sex, age, education, orfinancial resources. Other advantages include the socialbenefits and recognition of building one’s own organizationand the backing of a MLM company which provides theproducts and infrastructure necessary for success.

B. Network marketing poses problems for mostparticipants, resulting from pyramidal concept,motivation, and effects.

When the Federal Trade Commission ruled in 1979that Amway was not an illegal pyramid scheme—mainlybecause legitimate products were offered, the floodgateswere opened and multi-level marketing programs began toproliferate. But what is often ignored is the fact that MLMprograms are still pyramid schemes, modified by a varietyof compensation systems that change the character of thepyramid, but not the essential pyramidal concept,motivation, and effects.

The pyramid concept in MLM is seen in multiplelayers of distributors, with lower level distributorscontributing income to an “upline” who may have little todo with a given sale. This is distinguished from the typicalretail scenario in which a retailer may get two or three timesthe return per sale as the wholesaler, whereas with MLMthe upline distributor may get as much or more of a returnper sale (in commissions and bonuses paid by the company)as the front line distributor who actually sells the product.

Because MLM compensation systems reward front linedistributors only a small commission (usually less than10%) for selling product, recruiting to gain income fromdownline distributors is vital to earning a significant

income. This is distinguished from other direct salesprograms, in which the person selling and servicing theproduct typically keeps from 20% to 50% of the sale—enough incentive to concentrate on the end user as a valuedcustomer.

The motivation of most MLM is the opportunity tomake large amounts of income for a minimal investment oftime and money. One of the primary appeals of MLM is theconcept (touted at MLM opportunity meetings) of “timefreedom” or “leveraged income,” which allows a person togain an income flow from the efforts of others withouthaving to work directly for one’s own income. But becauseof MLM compensation systems, this requires success atrecruiting a downline, more than on selling the productsdirectly.

Critics complain that many MLM distributors placetoo much emphasis on the “opportunity” as opposed to theproduct, thus blurring the distinction between the productand the opportunity. As I mentioned, this can be accountedfor by the reward structure of MLM compensation systems,which benefits primarily top upline distributors—who mayreceive extremely large commissions from their aggregatedownline. An inordinate appeal to greed often becomes theprimary motivation.

A most troubling aspect of MLM is its effects onpeople. Because the compensation systems are heavilyweighted to reward upline distributors for their recruitmentefforts and because of the pyramidal nature of thesesystems, extraordinary income differentials are createdbetween upline and downline distributors. In fact, afterdeducting expenses for building and maintaining a network,only a tiny fraction of MLM distributors ever report apositive income on their income taxes. And if productspurchased from the company (that likely would not havebeen purchased were they not participants in the program)are subtracted, perhaps less than one out of 100 distributorsearns more than a minimum wage for their efforts. A highpercentage of distributors lose money—much higher thanmost other legitimate business and income pursuits.Careful examination of most MLM programs reveals apattern of exorbitant incomes accruing to relatively few topdistributors at the expense of hundreds and even thousandsof downline distributors who—even with diligent effort—come away empty-handed. In this respect MLM is akin toillegal pyramid schemes.

It is interesting to compare the odds of success ofMLM schemes with legalized gambling in Nevada. Itappears that on average one could do better at most any of

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the gaming tables or slot machines in Las Vegas—withoutinvesting all that time and placing valued relationships atrisk.

Some zealous MLM distributors will mortgage theirhomes or max out their credit cards (buying MLM productsand other expenses) to finance their ambition to achieve toplevels in their organization—which is seldom achieved.Others focus so much on recruiting to meet escalatingvolume requirements for higher distributor levels that theyignore the needs of spouse and family members.

Sometimes the recruiting practices of MLMdistributors are deceptive and overbearing. Often MLMdistributors will alienate friends and family members theyendeavor to recruit for what seems to them a self-centeredpursuit of a vaporous dream.

C. Summary and invitation for rebuttalIn summary, with network marketing, what appears on

the surface to be a fair and enabling marketing system forparticipants is in reality a legalized pyramid scheme withcharacteristics of concept, motivation, and effects similar tothose of an illegal pyramid scheme.

You are invited to prove me wrong—at least for yourcompany. This can best be done by providing full disclosureon payout distribution to your distributors on the attachedform. For the purposes of this study, this information mustbe broken down by percentiles, not by distributor level.

Please note that I am not asking you to reveal sensitiveinformation, such as individual distributor incomes or evenyour annual profits, which you may wish to keepconfidential. It is average payout to distributors bypercentiles (as indicated on the attached form) that willsatisfy the objectives of this study for the benefit ofconsumers.

Please also note that I am offering two options for yourresponse—an easy one (Option A) and a morecomprehensive one (Option B). It is assumed that Option Acould be competed quickly and easily from your existingaccounting system.

Option B requires a more extensive breakdown, butwould offer to those interested more conclusive evidencethat your company does or does not base its compensation todistributors on a pyramidal structure, as discussed above.For the purposes of this study, Option B would be muchpreferred, if you can return such data to us within a monthor so.

We are not making any assumptions about how mucheffort was put into any given MLM program orcompensation system, as it relates to success of failure ofany specific distributor or program. So it is important thatall participants in your MLM program for the year beincluded, even those who only bought a distributor starterkit or set of samples—whether or not they have doneanything with it.

Please mail completed form to:

MLM Payout Distribution StudyConsumer Awareness InstituteP.O. Box 488Kaysville, UT 84037

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OPTION A: Distribution of Payout to Distributors for the Most Recent Fiscal YearBeginning____________ and Ending ___________

Company name_______________________________ Contact person_________________ Tel. no.(_____)____________

Address_____________________________________________________________________________________________

City, state, zip________________________________________________________________________________________

Please check (ü) one:___a. We are willing to provide the information below and have it made available to the public.___b. We are providing the information below with the understanding that it may be used for compiling industry statistics but notidentified with our company in published reports.___c. We are not willing to provide the information requested. We realize that in refusing to do so we may be tacitly concedingthe conclusions drawn in the preliminary two-page report, entitled, “Network Marketing Payout Distribution Study.”

If you are interested in receiving information on the completed report when it is done, please check here_____ (This researchreport is to be sold for a reasonable price—yet to be determined—to recover costs.)

Important instructions: For purposes of analysis, distributors are to be broken down by distributor payout percentiles, notcompany-established distributor levels. Also, it is important that every person who has enrolled as a distributor (i.e., purchasedstarter kit or samples, or signed a distributor agreement) be included in these statistics, including those who have not soldanything or quit, even after one day.

Percentile break-down in payouts todistributors (bypercentile, notdistributor level)

Total number ofall of yourdistributors atthis payout level

Ave. total payout perdistributor (allcommissions and bonusespaid by the company, butexcluding retail margins

Less: average totaldollar amount perdistributor of productpurchases from yourcompany

Average net payout*per distributor (afterdeducting cost ofproduct purchases)

Top 1/10 ofthe top 1%of distributors ______________ $____________________ $_______________ $________________

Bottom 9/10 ofthe top 1%of distributors

______________ $____________________ $_______________ $________________

Next 9/10 of the top10% of distributors(the 2nd to the10th percentiles) ______________ $____________________ $_______________ $________________

Bottom 90%of distributors ______________ $____________________ $_______________ $________________

(Total 100%)

*It is recognized that income reported here does not take into account costs to distributors for conducting their MLM business.Such costs may include, travel, postage and shipping, long distance and other telephone costs, advertising, rental of meetingrooms and/or office space, fees for company conferences or retreats, supplies, sales materials, and other expenses.

THANK YOU FOR YOUR HELP! © 1999 Jon M. Taylor

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OPTION B: Distribution of Payout to Distributors for the Most Recent Fiscal YearBeginning____________ and Ending ___________

Company name_______________________________ Contact person_________________ Tel. no.(_____)____________

Address_____________________________________________________________________________________________

City, state, zip________________________________________________________________________________________

Please check (ü) one:___a. We are willing to provide the information below and have it made available to the public.

___b. We are providing the information below with the understanding that it may be used for compiling industry statistics but notidentified with our company in published reports.

___c. We are not willing to provide the information requested. We realize that in refusing to do so we may be tacitly concedingthe conclusions drawn in the preliminary two-page report: “Network Marketing Payout Distribution Study.”

If you are interested in receiving information on the completed report when it is done, please check here_____ (This researchreport is to be sold for a reasonable price—yet to be determined—to recover costs.)

Important instructions: For purposes of analysis, distributors are to be broken down by distributor payout percentiles, notcompany-established distributor levels. Also, it is important that every person who has enrolled as a distributor (i.e., purchasedstarter kit or samples, or signed a distributor agreement) be included in these statistics, including those who have not soldanything or quit, even after one day.

Ave. total payout perPercentile breakdown Total no. of distributor (all commis- Less: average total Average net payout perIn payouts to distribu- all distributors sions & bonuses paid dollar amount per distributor (aftertors (by percentile, not at this payout by the company, exclu- distributor of deducting cost ofby distributor level) percentile ding retail sales product purchases product purchases

First 1/10 of the top 1%of distributors ____________ $__________________ $_______________ $__________________

Second 1/10 of the top 1%____________ $__________________ $_______________ $__________________

Third 1/10 of the top 1% ____________ $__________________ $_______________ $__________________

Fourth 1/10 of the top 1% ____________ $__________________ $_______________ $__________________

Fifth 1/10 of the top 1% ____________ $__________________ $_______________ $__________________

Sixth 1/10 of the top 1% ____________ $__________________ $_______________ $__________________

Seventh 1/10 of the top 1%____________ $__________________ $_______________ $__________________

Eighth 1/10 of the top 1% ____________ $__________________ $_______________ $__________________

Ninth 1/10 of the top 1% ____________ $__________________ $_______________ $__________________

Bottom 1/10 of the top 1%____________ $__________________ $_______________ $__________________

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After breaking down average payout per distributor for the top 1% by tenths of a percent, please break down the next9% by whole percentiles:

Percentile breakdown Total no. of distributor (all commis- Less: average total Average net payout perIn payouts to distribu- all distributors sions & bonuses paid dollar amount per distributor (aftertors (by percentile, not at this payout by the company, exclu- distributor of deducting cost ofby distributor level) percentile ding retail sales product purchases product purchases

Second 1% ____________ $__________________ $_______________ $__________________

Third 1% ____________ $__________________ $_______________ $__________________

Fourth 1% ____________ $__________________ $_______________

$__________________

Fifth 1% ____________ $__________________ $_______________ $__________________

Sixth 1% ____________ $__________________ $_______________ $__________________

Seventh 1% ____________ $__________________ $_______________ $__________________

Eighth 1% ____________ $__________________ $_______________

$__________________

Ninth 1% ____________ $__________________ $_______________ $__________________

Tenth 1% ____________ $__________________ $_______________ $__________________

After breaking down average payout per distributor for the top 10% by whole percentiles, please break down the next90% in groups of 10% each:

Percentile breakdown Total no. of distributor (all commis- Less: average total Average net payout perIn payouts to distribu- all distributors sions & bonuses paid dollar amount per distributor (aftertors (by percentile, not at this payout by the company, exclu- distributor of deducting cost ofby distributor level) percentile ding retail sales product purchases product purchases

Second 10% (11-20%) ____________ $__________________ $_______________ $__________________

Third 10% (21-30%) ____________ $__________________ $_______________ $__________________

Fourth 10% (31-40%) ____________ $__________________ $_______________ $__________________

Fifth 10% (41-50%) ____________ $__________________ $_______________ $__________________

Sixth 10% (51-60%) ____________ $__________________ $_______________ $__________________

Seventh 10% (61-70%) ____________ $__________________ $_______________ $__________________

Eighth 10% (71-80%) ____________ $__________________ $_______________ $__________________

Ninth 10% (81-90%) ____________ $__________________ $_______________ $__________________

Bottom 10% (91-100%) ____________ $__________________ $_______________ $__________________

(Total 100%)

*It is recognized that income reported here does not take into account costs to distributors for conducting their MLM business.Such costs may include, travel, postage and shipping, long distance and other telephone costs, advertising, rental of meetingrooms and/or office space, fees for company conferences or retreats, supplies, sales materials, and other expenses.

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THANK YOU FOR YOUR HELP!© 1999 Jon M. Taylor

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Appendix C

Twelve Testsfor Evaluating a

Network Marketing (MLM) “Opportunity”

By Jon M. Taylor, Ph.D., Consumer Awareness Institute

Network marketing (a.k.a. multi-level marketing orMLM, consumer direct marketing, purchasing or giftingnetwork, etc.) developed from pyramidal concepts, whichinitially led to pyramid schemes, chain letters, and chainselling. While pyramid schemes are illegal, many MLMprograms have managed to circumvent Federal TradeCommission (FTC) rulings and applicable state laws.

Legislation and court cases have defined pyramid schemes asplans which concentrate on commissions earned for recruiting newdistributors and which generally ignore the marketing and selling ofproducts and services. However, many MLM promoters, even withgood products, emphasize recruiting simply because of acompensation system that rewards recruiting much more thanretailing.

An MLM program that some enforcement agencies maynot classify as an illegal pyramid scheme may for all practicalpurposes still be a product-based pyramid scheme (PPS). Strongpyramidal elements remain for most MLM programs, leavingparticipants with little chance of financial success (usuallyresulting in losses), except for a tiny percentage at the top of ahierarchy of distributors.

The following tests should help you avoid programs in whichyou will only be wasting your money, time, and effort.

üüTHE OPPORTUNITY TESTWere you approached primarily on the basis of the

actual value and need for the products—or for the“opportunity?” If the latter, the program may be actually apyramid device for enriching the company and a small groupof upline distributors.

Another red flag to look for is promoters who talk of“getting in on the ground floor” or “riding the wave” ofopportunity. Usually, the bulk of the income in these cases isalready locked in by the founding distributors in thepyramidal hierarchy.

üüTHE MARKET REALITY TESTMay MLM recruiters point to the huge growth potential

of their programs without considering the normal dynamicsof supply and demand. Without adequate controls, saturationin any given market may soon be reached—atleast in peoples’ minds.

Are numerous levels of distributors allowed—morethan is needed to get the products out to customers? Also,ask if the company allows unlimited recruiting ofdistributors in an area—with no territorial protection or

other provisions for preventing market saturation? If so,you may be buying a ticket for a flight that has alreadydeparted. You could be left holding a bag of empty promisesand a worthless ticket.

üüTHE PRODUCT TESTReview the products offered and ask yourself:Is it likely the products could be sold successfully on

their own merits without going through a MLMdistribution system? If nothing comparable is on the market,find out why.

Does the MLM company focus on legitimate productsof value to consumers, or does it emphasize fleeting trendsand timing, and exotic or secret formulas?

Are products of consistently high quality, and do theycarry a buy-back guarantee? Can all product claims (such ashealth claims) be backed up by reliable research? Are ordersfilled and shipped promptly? And are manufacturing andexpiration dates printed on consumable products?

üüTHE COMPENSATION TESTCan you as a distributor make a good income for the

time you spend selling the products—without recruiting asingle person? Or is the commission paid by the company forselling the products so low that you have to recruit a downlinein order to earn a significant income?

Would distributors several levels above you—whohad nothing to do with the sale—receive as much or moretotal payout per sale (including commissions and bonuses)from the company as you would get for selling the productor providing the service?

If the latter is the case, the emphasis is on incomefrom a downline of distributors (that you would have torecruit), not on the sale of products. Even though such aMLM program may have escaped prosecution as apyramid scheme, it may still be a de facto pyramid scheme(or PPS).

Your odds of success in such a program will not befavorable. While a few distributors at the top of the pyramidwill be rewarded handsomely, as many as 99% (over 99.9%in some programs) of distributors beneath them will comeaway empty—most actually losing money, after subtractingexpenses and product purchases. Also, in some programs,

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your quitting merely enhances the income of your upline—because income from your downline “rolls up” to those aboveyou.

Don’t fall for the line that it takes months or evenyears for most businesses to show a profit and that if youjust “work hard and hang in there” you will make lots ofmoney in this MLM program. Be aware that in othercomparable settings, sales distributors usually show arespectable income within a couple of months, or they turn tosomething else.

Ask distributors who have been with the company fortwo or three months if they are turning a respectable profit—after operating expenses and product purchases aresubtracted. If not, they are only fattening the pockets of theirupline.

üüTHE INCOME DISCLOSURE TESTIf an MLM recruiter touts huge income figures of top

distributors, request that the company disclose average payoutto distributors by percentiles (highest 1%, second highest 1%,and so on to the lowest 1%), so that you can determine yourchances of success. Ask for net payout (after subtractingproduct purchases) for all distributors who ever signed up,including those not now active. If they fail to furnish suchdata, they are not providing the balanced information youneed to make an informed decision.

Estimate the operating expenses for building yourdistribution network. For anyone serious about building anMLM business, a significant amount will be spent ontelephone costs, travel, samples, sales materials, officesupplies, mailing costs, printing and duplication, and (whenfriends and family don’t respond) some advertising. Mostdistributors wind up spending far more money onproducts and operating expenses than they bring in. Thebest source for expense information is ex-distributors, notcurrent distributors who are in denial about how muchthey are actually spending.

If less than 1% of all distributors earn the equivalentof a minimum wage for their time (after subtracting allexpenses and MLM products purchased), you might want toconsider a more profitable use of your money, time, andenergy. (Some researchers estimate that for most MLMprograms, less than 1% of distributors ever turn a profit.)

Another acid test of the profitability of an MLMdistributorship is to ask the person recruiting you to showyou his/her last year’s tax return. It has been found that it isextremely rare for network marketing participants to show aprofit for their networking efforts on their annual tax returns.

üüTHE “PAY TO PLAY” TESTFind out how high the expectation is for you to

purchase products, services, training, etc., over a period oftime, in order to be a serious participant. In other words,what will it cost you to “play the game?” Don’t be fooled by asimple request for a small sign-up fee, soon to be followed byendless invitations for specials on purchases of samples or

inventory, accelerating bonus levels for higher sales plateaus,paid seminars, and training sessions or retreats.

This requirement (or strong suggestion) that you makelarge purchases of products over a period of time to qualifyfor increasing bonus levels or purchasing discounts is one sign of aproduct-based pyramid scheme. After months or years of fruitlesseffort and a garage full of products, some participants come torealize they have merely been paying into a pyramid scheme in theform of payments for unneeded products.

üüTHE PRICE TESTAre the company’s wholesale prices low enough to

allow a respectable profit when marking up for resale—ata retail price that is still competitive with comparableproducts through other sources? Or are retail prices sohigh that they must be sold at wholesale to achieve anyvolume?

If products are priced at a premium to support alarge network of distributors, then the premium portion ofthe price could be considered the pyramid portion. So if aMLM product sells for $40 and a comparable product wouldsell for $20 at a typical retail outlet, the $20 premium may bedeemed the pyramid portion of the price and would flow totop distributors in typical pyramid fashion.

üüTHE GOLDEN RULE TESTHow did you feel about the way you were recruited to do

the business, and how do you feel about approaching yourfamily and friends in the same way? How important areyour relationships to you? Are you offended when theyattempt to exploit your connection with them for monetarygain? Would you want to do the exploiting?

üüTHE TIME FREEDOM TESTThe perennial dream of those with a pyramidal

mentality is to be successful at recruiting a downline that willbring in enough money to support them so they won’t have towork themselves—thus giving them “time freedom.” Theycan then “leverage” their time by living off the efforts ofothers.

If a recruiter promises that by working hard for a brieftime period you will never have to work again, ask whatpercent of their top distributors are no longer activelyinvolved with the company—and never attend opportunitymeetings.

Ask veteran distributors when they last took an extendedvacation. Were they able to do so without significant lossesfor not tending their downlines? And did any of them quit orscale down without experiencing major financial losses?

Better yet, ask for a copy of the recruiter’s downlineand upline. Contact distributors at several different levelsto see if any have achieved “time freedom.” And if youknow the spouse of any of the distributors, you might askwhat problems the family has experienced due to MLMparticipation (intrusive phone calls, untimely visits to thehome, and neglect of family and other duties by thedistributor).

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üüTHE HONESTY TESTHas the recruiter been devious or up front in his or

her inviting attempts? And can the products and“opportunity” be sold without making exaggerated productand income claims? Ask for validation of each of the claimsmade.

If you find the truth frequently distorted, powerfuland escalating incentives may be driving the recruitment.If normally honest persons feel the need to exaggerateclaims to sell the products and the program, you may findyourself having to do the same.

üüTHE CREDIBILITY TESTMLM promoters who don’t command respect

themselves may lean heavily on the “credentials” or“character” of others involved in the “opportunity.” If suchreferences are used to excess, watch out. Such credibilitylinks can be deceptive. Why? Because the ethics of MLM areso tricky to sort out that respectable and high level peoplehave been drawn into the most problematical of programs.

üüTHE SUPPORT TESTDoes the company offer an adequate support

infrastructure to handle a temporary burst of volume?Will your upline be there when you need them, or do

they have a history of jumping ship when the next hot MLMdeal comes along?

Are conferences and training programs, audio andvideo tapes, etc., free of charge (as is the case elsewhere forcompany sponsored programs), or are you expected to payfor them—as another revenue source for the company andupline?

A FINAL WORDIf you have found this flyer helpful in deciding about

participation in MLM, you could be doing your friends andfamily a favor by sharing this information with at least five ofthem. Then ask each of them to share it with five morepersons, and suggest they tell each of them to share it withfive more, and . . . .

© 2000 Jon M. Taylor. This flyer may be reproduced in itsentirely for consumer awareness, but may not be sold orpackaged for sale without the author’s written permission. Ithas been designed for easy reproduction on 8½ x11-inchpaper.

For more information on problems with networkmarketing and possible solutions, visit our web site—www.whatisgood.com/NWM. Or write:

The Consumer Awareness InstituteP.O. Box 488Kaysville, UT 84037

NOTE: A reproducible version is available free of chargefrom the author for printing on 8½x11” paper to be foldedin a tri-fold format, which can be copied and folded for ahandy pocket-size handout.

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Appendix D

Web Sites that Offer a Critical Review of MLM/Network Marketing.

By Jon M. Taylor, Ph.D.

A new and very promising non-profit organization— PyramidScheme Alert—has been formed for combating all forms ofpyramid schemes. Information and resources that can beextremely valuable for enforcement agencies, consumeradvocates, educators, researchers, writers and journalists,consumers, and other interested parties will be posted on theweb site at http://www.pyrmidschemealert.org

There are hundreds of pro-MLM sites on the web, and blatantpyramid schemes are continually being promoted. Nearly allof these sites are selling a program of some kind. In the pastlittle solid information countering their claims has beenavailable. However, this is rapidly changing. In my research Ihave come upon some excellent sites for those who want to beinformed on the problems of MLM/NWM:

Ruth Carter (a pseudonym to protect herself from anavenging upline) has offered some great services toconsumers by posting (at her own expense):--court cases and petitions against MLM’s--an MLM survivor’s home page--relevant media articles--instructions on what to do if you’ve been deceived--how to take legal action against MLM’s, etc.Ms. Carter has also written a very helpful book about AmwayMotivational Organizations (AMO’s) and the whole Amwayscene entitled “Behind the Smoke and Mirrors.” Check it allout at: www.mlmsurvivor.com

Robert Fitzpatrick is the author of the provocative book (witha great title) False Profits. An example of the fine quality ofhis writings and observations, see his insightful articleentitled “Is MLM legal?”:http://www.falseprofits.com/FSLegalityPg.htmlAlso click on “70% Rule,” “Amway’s Rule of 10” and “FTCWarning.” Mr. Fitzpatrick is becoming an important figure inthe fight against illegal (or what should be illegal)pyramidism in all its forms.Also on Fitzpatrick’s site is an excellent analysis entitled:“The Dark Side of MLMs” by Ravi Dykema (Publisher/Editorin Chief, NEXUS, Colorado's Holistic Journal - Reprintedwith permission by NEXUS from the January/February, 1999Edition) http://www.falseprofits.com/NexusEditorial.html

One of the most cogent of articles on MLM/networkmarketing is written by Dean VanDruff and is entitled“What’s Wrong with Multi-level Marketing?” It can be foundat:http://www.vandruff.com/mlm.html

His “Frequently Asked Questions” is a great retort to all thosewho say, “Yes, those criticisms about MLM are all true aboutall those OTHER MLM’s, except (of course) THIS one. Is itnot truly different from all the rest?” Check out VanDruff’scut-to-the-chase answer at:http://www.vandruff.com/mlm_FAQ.html

Quoting VanDruff about another valuable resource: “AmiChen Mills ‘Shaking the Money Tree’ is fascinatingjournalism that captures the ‘stink’ of MLM pathology andculture most vividly. Hold your nose, and dive into majordeja-vu” athttp://www.metroactive.com/papers/metro/10.03.96/cover/multilevel-9640.html

Want to read some painfully true stuff from a confirmedcynic, Professor Robert T. Carroll, who specializes inexposing all sorts of popular myths and scams? Check out theMLM section of “The Skeptic’s Dictionary.”http://dcn.davis.ca.us/~btcarrol/skeptic/mlm.html

For this one, I’ll quote the introduction to this myth-exploding site:“Welcome, fellow 'Truth Seeker'. This site takes a good lookat MLM and network marketing from the perspective ofsomeone (me) who once built a sizeable downline. I've beenthere, and I have a perspective that took me years to acquire.This involves you. I'm not talking about ‘them’ here, this isn'tsomeone else's problem...this is YOU. If you're smuglydefending the myths of network marketing, ask yourself thesequestions:” [And then prepare for some very challengingquestions. It is hard to imagine anyone choosing any MLM-type business after reading this and the follow-up informationwith an open mind!]http://members.aol.com/multisense/home.htm

“Is Your Church a Marketplace?” A disturbing book by KimS. Mather reveals the destructive influence of MLM/networkmarketing on religious communities.http://www.newwave.net/~poohbear/chaching/index.html

“Quackwatch - Your Guide to Health Fraud, Quackery, andIntelligent Decisions” sponsors a site loaded with myth-debunking information about health and related scams,including MLM/network marketing companies that promotehealth products through amateur distributors. Its commentaryabout MLM’s is well worth reading. For example:“MLM Watch - A Skeptical Guide to Multilevel Marketing”Operated by Stephen Barrett, M.D.

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“Accurate information about multilevel marketing is not easyto get. Few publishers, editors, and broadcasters are willing toexamine this topic in depth. Most reports reaching the publicexpress what the companies and individual distributors wouldlike people to believe. Nearly all MLM companies sellinghealth-related products exaggerate their value, and the vastmajority of people who become distributors do not makesignificant income.” Dr. Barrett has a site with several pagesdedicated to MLM consumer watchdog information. It can befound at http://www.MLMwatch.org The site even has aninvitation for plaintiffs in class action lawsuits againstMLM’s.See also “The Mirage of Multilevel Marketing,” an excellentanalysis also by Stephen Barrett, M.D., a dedicated foe ofMLM’s offering health-related products (and exaggeratinghealth benefits)http://www.quackwatch.com/01QuackeryRelatedTopics/mlm.htmlAnd for reporting quackery sponsored by MLM/networkmarketing companies, you are invited to participate in the“Multilevel Marketing Project” at:http://www.quackwatch.com/06ResearchProjects/mlmrsch.html

Quatloos! Features useful stuff about scams and financialfrauds. Read its scathing “Guide to Multi-Level Marketing(MLM)”http://www.quatloos.com/mlm/mlm.htm

This site for the World Wide Scam Network includes amotley collection of complaints, exposés, analyses, legalactions and defenses, and resources pertaining to currentMLM’s and pyramid schemes under investigation.http://www.worldwidescam.com/index.htm

Scott Larsen does a very creditable job of exposing mythsabout Amway/Quixtar in “The Amway/Quixtar Distributor's‘Little White Lies,’” where he blasts the notion that ‘If youhave a dream the facts just don't matter.’http://www.awod.com/gallery/rwav/slarsen/amway.htmlThen you analytical types must read: “Amway: A NegativeSum game?”http://www.awod.com/gallery/rwav/slarsen/Amway_zerosum.html

The Cagey Consumer offers a report on multi-level marketingpacked with sub-articles, references, and links.http://www.geocities.com/WallStreet/5395/mlminfo.html

Cult expert, founder of “Resource Center for Freedom ofMind,” counselor and author Steven Hassan looks atMLM/network marketing as exhibiting many of thedestructive traits of a cult. Check out the cultish aspects ofAmway and Quixtar in the article “Amway MotivationalOrganizations at:http://www.freedomofmind.com/groups/amway/amo_qmo.htmIn addition, see the article entitled “Multi-level MarketingPlans,” produced in cooperation with the North AmericanSecurities Administrators Association November 1996, which

can also be found at:http://www.ftc.gov/bcp/conline/pubs/invest/mlm.htm

“Amway world wide dream builders and the things they willsay to profit from your dreams.” Potential Amway recruitswill be inoculated against their program after reading “thethings they will say.”http://www.angelfire.com/or/amwaydreamers/index.html

Here is a site by someone angry enough to write about MLMabuses and willing to link with other sites, but preferring toremain anonymous (probably fearing retaliation):“Network Marketing - Networking - Multi-Level Marketing-MLM - NWM - Pyramid Selling.” http://mlm.4mg.com/

Here is a site loaded with information damaging toAmway/Quixtar: [Quoting from the introduction] “Welcometo Amway: The Continuing Story” WARNING! This sitepresents facts, opinions, and other information that is criticalof the Amway business. There are things on this site that theAmway Corporation, its distributors, and Quixtar (its "sistercompany") would prefer you not know. If you are easilyoffended by such information (or your upline would not allowyou to view it), please click your browser's 'back' button nowso you do not expose yourself to this critical information.Otherwise, please continue... [But don’t miss what is loadedon this site.] http://www.cocs.com/jhoagland/Unfortunately, this and other web sites are constantly underattack by Amway, using expensive legal maneuvers that placea great burden on those trying to speak out against thedeceptions they foster. It’s a David and Goliath type ofstruggle, to be sure. Hopefully, Goliath won’t win in the longrun. For information on this continuing saga, check out:“Welcome to The Anti-MLM and Anti-Amway WebringHome Page” at: http://www.cocs.com/jhoagland/webhq.html

The Anti-MLM and Anti-Amway Webring features somesites by angry ex-MLM distributors who feel they andmillions of others are being routinely ripped off byMLM/network marketing companies. Some of the sites areless than professional (being self-funded), but they are veryrevealing of how mad some people are about this deceptivebusiness practice. http://www.webring.org/cgi-bin/webring?ring=amaaaw;list

Please check out my web site at http://Whatisgood.com/nwmIn this site you will find information on my 5 years ofresearch on network marketing (NWM, a.k.a. MLM). Inaddition to the information contained in this report, you willfind information on a book directed to members of theChurch of Jesus Christ of Latter-day Saints entitled “TheNetwork Marketing Game.” It was directed to this specificgroup because so many members have been drawn into theNWM web. Information on the book can be found at:http://whatisgood.com/nwm/nwmlds.htm