Timothy J. Muris (left), accompanied by former Assistant Secretary of Defense Charles S. Abell. (Courtesy of Wikimedia Commons)
A few months back I opened up a series on a ghastly hustle, which saturates the culture of the right: “multi-level marketing” (MLM)—pyramid schemes, if you will. To review:
• When the industry emerged in the mid-1960s, schemes in which original investors, and the companies themselves, thrived even as almost all new recruits further down the chain made nothing, were considered to be frauds, plain and simple. They were thus widely prosecuted.
• The burgeoning “industry,” led by the DeVos family’s Amway, adjusted via clever lawyering—successfully reframing pyramid schemes as “direct selling,” each new “distributor” was now induced to purchase goods each month as part of their “investment”—only under such staggering prices that it’s almost impossible for the distributor to make money. The lawyers in a case against one such MLM company, Trek Alliance, which “sold” (not many) water filters, cleaning products, nutritional supplements and “beauty aids,” did an analysis in which they concluded that of their distributors “98.8 to 99.6 percent fail to achieve any earnings,” and “in all likelihood more than 96 percent…experienced business failures.”
• As noted in a report called “The Main Street Bubble: A Whistleblower’s Guide to Business Opportunity Fraud—How the FTC Ignored and Now Protects It” by Robert L. FitzPatrick, author of False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes and an expert witness or consultant in more MLM cases than any other private citizen, such massive failure rates “are intrinsic to the design. 99 percent of consumer/investors must lose for a tiny group at the pyramid’s peak to gain…. The system is closed. Value is not exchanged. Money is merely transferred.”
• These hustlers also have to grow or die—expanding the scheme to new marks is key to their business model. Writes FitzPatrick, they “churn through 50-80 percent of victims annually, replacing them with new ones.”
I concluded that opening post, “Under the Clinton administration, regulatory efforts were stepped up.” The Federal Trade Commission’s senior economist was an expert on MLM, and devised 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—70 percent, the FTC concluded, which virtually no one ever achieved. “His schema made it easier to prosecute and protect the victims. The prosecutions began.”
Which brings us to the chapter of the story when the prosecutions stopped. According to “The Main Street Bubble,” the Federal Trade Commission has direct regulatory oversight over multi-level marketing. This oversight was effectively abandoned in 2001 following President George W. Bush’s appointment of Timothy Muris to chair the FTC. At that time, Muris was an anti-trust lawyer whose largest client was… Amway.”
I shit you not.
Muris promptly halted the investigation and prosecution of MLMs and failed to monitor enforcement orders against companies already prosecuted (many companies, FitzPatrick writes, “are blatantly violating these orders”), Additionally, he “issued a widely circulated letter that obscured and appeared to permit practices—paying rewards for ‘endless chain recruiting’ without retail sales as a revenue source—that the courts, and 30 years of earlier FTC policy have declared are illegal. The letter was used by MLM companies to persuade millions of consumers that previous FTC policies and court actions that defined pyramid selling fraud were no longer valid.”
And that’s not all.
Muris also ignored consumer requests for action on frauds from which they suffered. When a proposed FTC rule on “business opportunity” frauds that was years in making—what Doug Brooks, an attorney who’s brought ten class-action suits against MLM over the last twenty years, told me was “a very modest pre-sale disclosure regulation”—approached fruition, his staff rejected the approaches of whistleblowers, instead meeting with MLM lobbyists seeking to exempt their industry. (Which, it turned out, they were, making the new rule virtually moot.) The revolving door started spinning: Muris going to work as an MLM lobbyist, to influence the agency he had only just left—a Bush director of consumer protection went to work for Amway. Under Bush, FitzPatrick told me, the FTC “effectively legalized this form of Main Street business fraud”—as Business Week has documented in 2010. “It was only this past January,” Brooks says, “that the Federal Trade Commission announced its first prosecution of a multilevel marketing scheme in six years.”
Amway: it’s the Republican way. The GOP and MLM, it turns out, go together like tea and toast. Or maybe like fossil fuels and SUVs: the first fuels the second, and everyone loses. That’s the story we’ll turn to next time.