Attorney Douglas Brooks is a truly remarkable man. Formerly a specialist in franchise law, he now devotes his time to helping people defend themselves against the financial depredation of multi-level marketing companies, known as MLMs. He is tireless in fighting against an industry dedicated to bamboozling money from ordinary people with promises of exorbitant wealth for little to no work. From helping to bring down the “Consumer Buyline” scam run by now-imprisoned NXIVM cult leader Keith Raniere, to appearing in the Herbalife documentary Betting On Zero, to organizing the first global conference on multi-level marketing schemes. The second such conference will be taking place on June 10th and 11th this year; I am honored to be speaking there, along with William Keep, professor of the College of New Jersey School of Business; Peter Vander Nat, a former economist at the Federal Trade Commission; Stacie Bosley, an economist at Hamelin University in Minnesota; retired sociologist Janja Lalich, author of the seminal recovery book Take Back Your Life; and Bonnie Patton of truthinadvertising.org, who will be the keynote speaker.
What is a Multi-level Marketing Group (MLM)?
To understand how and why these organizations capture victims and drain their bank accounts, it is first necessary to understand what a multi-level marketing scheme is and how it is different from other ways of selling. The first term is direct selling – simply put, any time someone sells something without a brick-and-mortar store (the door-to-door encyclopedia and vacuum-cleaner salesmen of my youth would be a prime example). Brooks points out that there is nothing inherently wrong with this model: “it’s American as apple pie.” Many MLMs like to refer to themselves as “direct sellers” – the powerful lobbying group that defends their “right” to defraud the public is the Direct Selling Association – but there is an important difference: in an MLM, those who make money do not make money from selling products, but from recruiting others to join the scheme.
It works like this: Mary recruits Sally, who, after buying an inventory of “products” from the MLM company, tries to sell it to anyone she can (usually family and friends). The MLM company pays a portion of Sally’s purchase to Mary as a “commission.” Sally then recruits Alice and Helen, who also purchase products from the MLM company and the company then pays a small commission to Sally and a bigger commission to Mary. Importantly, Sally and Mary will only receive commissions if they keep on buying more inventory, regardless of whether they are able to sell the products at a profit. This goes on for as many levels as can be recruited, with a steady income funneled upwards to those at the top of the pyramid, while those not at the top are rarely able to recoup what they have paid for the merchandise. The way the system plays out, some 97 to 99 percent of those involved in multi-level marketing lose money. “It’s like buying a lottery ticket for last week’s lottery,” Brooks says. “The winners have already been selected.”
This model works against standard franchise logic: a McDonald’s franchise will not benefit from another restaurant right across the street, as they would be in direct competition for the same customer base. This “cannibalization” is an inherent feature of an MLM: “distributors” are pressured to recruit and sell to their friends and family – assuring an unhealthy level of overlap between Alice’s customers and Helen’s.
Another important – and much more disturbing – difference from the standard franchise model is transparency. If I were to buy a McDonald’s, before signing anything, I would be given a complex, phone-book thick document of financial disclosure – including how much money I could realistically expect to earn, the success rates of similar franchises in the area, the exact terms of the deal, what is expected of me, and what I can expect as the new owner. For MLMs, however, there is a loophole – if the initial investment in a “business opportunity” is less than five hundred dollars, no transparency or disclosure is necessary; the person recruiting you into the MLM has no legal obligation to tell you anything other than what they want you to hear: a recruiter can promise you “instant” wealth, the lifestyle of a millionaire, that you will be able to quit your job and own multiple vacation homes, expensive cars and boats – all for little money down and only working part-time.
Failure to Act by the Federal Trade Commission
When the Federal Trade Commission tried to close this loophole in the late 1990s by proposing a new “Business Opportunity Rule”, the Direct Selling Association, a wealthy and influential lobbying group, mobilized its forces and persuaded 15,000 MLM distributors to send “cookie-cutter” form letters to the FTC, pleading that their industry was in danger. The DSA also persuaded eighty congressmen to send letters, the FTC was cowed into backing off; to this day, no transparency – or honesty – is required of MLMs and their recruiters, and they are careful to put their required “start-up” fee at less than $500; ACN, the MLM endorsed by former President Donald Trump, charges exactly $499 as its entrance fee.
For an MLM distributor, lack of transparency is part of the selling toolbox: many recruiters will not even mention the company name to potential recruits, getting them to agree to a meeting using the “curiosity” model founded by Amway, the “great-granddaddy” of all MLMs. Prospective recruits are told that they are being offered an opportunity, but they are told nothing more until they agree to meet with the recruiter, becoming a captive audience to a sales pitch.
Alongside the lack of transparency is an unhealthy dose of magical thinking, courtesy of such New Thought traditions of “the Secret” and the Law of Attraction – this battery of psychological manipulation techniques also includes toxic positivity and victim-blaming; distributors who do not make the millions they were promised are told that they did not have the “correct” mindset, or that they failed due to negative thoughts, or simply not trying “hard enough.” There is an entire “shadow” industry enveloped within the MLM world of books, tapes, and lectures sold to distributors, “educating” them in the “right” way of thinking.
MLMs also deliberately recruit among the disenfranchised and the disadvantaged, aiming their pitches at those who are desperate for extra income – at last year’s conference on MLMs, I was surprised to learn that some 75% of those in MLMs are women. People who are already in other high-control groups are also a likely target; they are often looking for extra income, they have a ready-made group of potential customers in their fellow members, and if their group espouses some form of the Law of Attraction or similar magical thinking, they are primed for the belief system used to control the members of an MLM. In Utah, the MLM capital of the world, there is a standing joke that MLM stands for “Mormons Losing Money.” Even former cult members can fall prey to recruitment: soon after exiting the Moonies, I was approached by fellow former members offering me a “business opportunity” in their MLM. Many MLMs will go overseas, preying on those in third-world countries, perpetuating the lie that their industry is a pathway to a better lifestyle, the American Dream overseas. “It’s one of our worst exports,” Brooks observes.
An MLM distributor is urged to view friends and family as potential customers or even recruits; it is common for these people to become overwhelmed with the constant sales pitch. Family members and friends who express doubt about the MLM or its products will be labeled “dream-stealers,” and, just as in any high-control group, those who cannot be won over must be ignored or even shunned. In the world of MLMs, your only “reliable” source of support resides within the organization – and any lack of success you experience is your fault.
Many MLMs will use conferences and conventions to drain additional funds from their distributors, while also bringing them into a tightly controlled environment, featuring flashing lights, loud music, rousing speeches, and glitzy presentations designed to churn the emotions and lower the capacity for critical thinking: the whole event is designed to whip people into a frenzy and make them forget that they’re losing money. Those who sit atop the pyramid structure are applauded and held up as an example of what is possible – if only you work hard enough and think the right thoughts! For these conventions, MLM companies pay celebrities millions of dollars to appear and say a few glowing words about the product. Unfortunately, many celebrities (or, rather, their agents) fail to do due diligence when accepting a speaking engagement; Madeline Albright spoke for Herbalife, probably not understanding the harmful nature of the company.
What Can Be Done?
Indeed, the greatest problem is one of awareness. Due to a mixture of non-disclosure/non-disparagement clauses and an ingrained culture of victim-blaming, those who have been scammed out of money by an MLM are unlikely to report or discuss their experiences, shame, and guilt closing their mouths. Lobbyists who wish to convince congress that calls for transparency are attempts to destroy their industry are aided and abetted by notable politicians Until they hear from more citizens who have lost money to these predatory companies, congress will continue to listen to the lobbyists and the politicians who earn millions from MLMs, such as Donald Trump and Ben Carson, and especially former education secretary Betsy DeVos’ family has earned millions from Amway.
Douglas Brooks has been fighting to raise awareness of the problem. I salute his efforts and want to emphasize the importance of his work. I have always spoken out for the de-stigmatizing of cult involvement, and it is even more necessary to speak out now. If you or someone you know has been affected by an MLM, it is vital to make your voice heard. In addition to using the hashtag #IGotOut, writing to your congressman is easier than ever; each congressional office maintains a website where it costs you nothing to send your representative a message telling your story. Congress needs to hear from real people about the real harm that is being done, to counter the lies bought with stolen money by powerful lobbyists.
Multilevel Marketing and Consumer Protection
Multi-Level Marketing Groups Defraud Consumers! (Opens in a new browser tab)
Beware the “Main Street Bubble” of Multi-Level Marketing Groups Without U.S. Government Protection (Opens in a new browser tab)
www.mlmconference.com (information about the upcoming MLM conference as well as videos and materials from all of last year’s conference)