Eye on the Pyramids (Part 1: How It Works)

Eye on the Pyramids (Part 1: How It Works)

Eye on the Pyramids (Part 1: How It Works)

Part 1 of a series on “multi-level marketing” scams—pyramid schemes and the conservative politicians who love them, and the ordinary conservative citizens who are victimized by them.


Bernie Madoff, pictured here after being placed under house arrest in 2008, is not the only one in the business of building pyramids. (Reuters/Shannon Stapleton)

Last year I published an article in The Baffler called “The Long Con” that demonstrated how practices we associate with snake-oil salesmen saturate the American right—not just in its ideological appeals but in the way right-wing politics corrals a fleecable multitude all in one place, which conservative publications literally rent out as a source of handy marks for con men. A lot of folks found this to be a revelation, a bittersweet pleasure for me. On the one hand, it’s a blessing to me to be able to teach people new things about the world around us. But on the other hand, it’s frustrating; I wish people already knew about this stuff. It reinforces a fact: America truly does harbor two separate and nearly incommensurate tribes, “Red” and “Blue,” if you will; how many of us Blue folks know that getting roped into coughing up hard-earned money you’ll never see again to Republican-affiliated “multilevel marketing” (MLM) companies—in hustles formerly known as “pyramid schemes”—is as common in Evangelical and Mormon culture as going to yoga class in our own?

Robert Fitzpatrick, the author of False Profits: Seeking Financial and Spiritual Deliverence in Multi-Level Marketing and Pyramid Schemes and an expert witness or consultant in more MLM cases than any other private citizen, estimates that the industry Hoovers $10 to $20 billion out of the pockets of Main Street Americans every year. And hardly any of us know anything about it. As he explained to me in an e-mail, “Just as the Tea Party exists as a kind of phantom, funded quietly and invisibly from on high, with amorphous, uncounted members, the MLM industry has permeated Main Street without media recognition of its scale or force and largely in disguise as ‘direct selling.’ ” But “the Tea Party is at least beginning to be studied, its funding traced, its leaders examined.” MLM? Not so much. His book, published in 1997, was the first on the subject, though the industry has been rampant since the 1970s—and, save for a notable exception two years later from the heroic folks at tiny South End Press, there have hardly been any others since. That’s why I’m beginning a series on the subject today—in the hope that people will spread the word as widely as possible, and start learning more, and even organizing, on their own.

Let’s start with some basics—with some key regulatory questions. Fitzpatrick wrote a report called “The Main Street Bubble” that he hopes members of Congress will use to enhance FTC oversight, and to persuade the new Consumer Financial Protection Bureau to put MSM scams under its umbrella. It notes, “When they began to appear in the mid 1960s, pyramid selling schemes were widely understood to be classic frauds and were widely prosecuted.” The model statute came from California, which in 1968 banned “endless chains”—in which a franchisee only or mostly makes money from recruiting further franchisees, not from selling actual retail products. (In the most extreme variety of pyramid scheme, there is no actual product.) Another, softer practice, “referral-based discounting,” was widely outlawed: that means franchisees had to recruit new customers if they wanted to buy the material they were supposed to be selling at the advertised price. “By design,” Fitzpatrick explains, both practices “doomed most consumers to losses.”

The marquee outfit practicing such hustles, of course, was Amway—short for “American Way”—founded by the DeVos family of Michigan in 1964. In the 1970s, the FTC lost a court effort to close down Amway as an inherent fraud. A 1979 administrative law decision, however, did limit the conditions under which it could operate. Via clever lawyering, Amway adjusted—which it found easy to do under the relaxed regulatory regime of the Reagan years. Endless chains could be successfully reframed as a legitimate “business opportunity” called “direct selling,” in which, Fitzpatrick writes, “Each new distributor was induced to purchase goods each month as part of the ‘investment’”—only at staggeringly inflated prices, with the profit designed to flow up the chain to fewer and fewer parties, ultimately to the company itself. In short, “without sustainable and profitable retail sales opportunity for the distributors, the reward can come only from one place: the investments of later recruits.”

Such companies “churn through 50–80 percent of victims annually, replacing them with new ones,” which proliferate like kudzu. They have to, in order for their sponsors to survive: without new marks, the base of the pyramid disintegrates. Their failure is the company’s success. According to the declaration of expert witness Peter J. Vander Nat in the case of Federal Trade Commission v. Trek Alliance, who studied a database of 22,281 distributors for a company that “sold” (not many) water filters, cleaning products, nutritional supplements and beauty aids, “Under several optimal scenarios in which the distributors do exactly what is needed to obtain the rewards proposed by the Pay Plan, approximately 98.8 to 99.6 percent fail to achieve any earnings,” and “in all likelihood more than 96% of Trek distributors experienced business failure.”

Under the Clinton administration, regulatory efforts were stepped up. Vander Nat became the FTC’s senior economist, expert at teasing out the fraud behind “direct selling,” devising a test that determined what percentage of purchases by “distributors” would have to be resold to actual retail customers (instead of future “distributors” down the chain) for the “distributor” to actually make money without recruiting further marks. That number, he learned, was typically 70 percent, which virtually no one ever achieved. His schema made it easier to prosecute and protect the victims under Section 5 of the FTC Act, which regulates business fraud. Prosecutions began, gathered steam.

And what happened next? Tune in next time, when, likes the sands in an hourglass, a new presidential administration turns—a Republican administration. We’ll learn what conservative elites think about such sorts of business practices: that they judge them, well, as the American Way. Why not? They’re often the very same people.

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