This article by Stacie Bosley and Kim McKeage examines the diffusion of multilevel marketing and the risk of pyramid scheme activity.  This article closely examines the case of Fortune Hi-Tech Marketing in Montana, a trade company that was notoriously shut down after multiple state level lawsuits involving Montana, Texas, and North Dakota.  This company started out with two individuals who sat at the top of the pyramid and made millions by recruiting more and more investors below them.  Their business outline worked to where eventually, the new recruitment investments would pay for the preceding returns that were due to the investors who came before them.  This scheme continued and worked for years until almost 94% of the entire company was making less than a dollar, or in debt to the incorporation, on average every month.  This dramatic gap can be seen in the figure one diagram, where it is ironically presented as a pyramid.    This scheme boiled over promptly in a series of court cases that resulted in the complete liquidation of the company.  In the Montana v. Fortune Hi-Tech Marketing Inc (2010) court case, Montana stated, “FHTM is not a multilevel distribution company, but rather a pyramid promotional scheme because the compensation each participant in the program receives is derived primarily from obtaining the participation of other persons in the program and not the sale of goods and services.”  This was a very intriguing find because it shows how easily a business can slip into this type of scheme that can financially stunt or ruin so many individuals.  

Reading deeper into this article, it explicitly differentiates legal multilevel marketing from the pyramid scheme and how diffusion is intended to happen within these corporations.  The correct “legal” mode of diffusion works in a way that the newly recruited investors get paid their return from the net earnings of the company, rather than the investments of new recruitments.  This is a sustainable form of multilevel marketing, however, it more than always never works out that way.  Greed is usually the culprit of why companies choose to use non renewable forms to pay new investors, and it creates a never ending domino effect of everyone trying to cover themselves.  That is why multi level marketing is such a dangerous game, because it can easily turn into a legal, let alone moral nightmare.  This begs the moral question of whether these business platforms are really worth the risk involved.  Many of these markets are still thriving legally today such as NuSkin, Doterra Essential Oils,  Rodan + Fields, Scentsy, and many others.  Here is a list of the top thriving companies that fall under this category today.  Many of these markets fall under legal regulations, however their distribution platforms show that they are still extremely reminiscent of the Pyramid Scheme.  Many of these companies have had numerous issues and lawsuits with the Federal Trade Commission, yet still continue to operate today.  In the 1990’s the FTC led multiple investigations into Nu Skin enterprises for advertising false income amounts over their product distributors.  Recently in 2016, NuSkin was sued by China in a Utah State Federal Court for operating a “suspected illegal pyramid scheme” which resulted in a $45 million dollar settlement for the corporation.  Later that year, the same company was involved in bribing a Chinese official to allow them to continue operations in the country.  Granted the company’s thriving success, the morality of their work still remains utterly questionable.  Nu Skin is not the only large scale corporation that has run into trouble with legal constraints as these.  It is a constant issue for this industry which begs the question of how ethically correct it is to allow them to continue.  

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CC BY-SA 4.0 How Multi Level Marketing Has Failed in the Past by Maxwell is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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  1. Paul 7 months ago

    Maxwell,
    I think you do a nice job here of exploring the ethical and economic issues involved with multi-level marketing, with substantial evidence to back up your claims. My question to you is, what should be done about these corporations who operate either with a “pyramidesque” platform, or simply blatantly use a pyramid scheme to recruit investors? One of the issues with these companies is that it can be exceptionally difficult to discern a pyramid-based company from one that isn’t. Many of these companies, for example, advertise their businesses as a simple, obvious way to get rich quickly. While those types of statements would generally raise red flags for most people, these companies still seem to suck people in who end up suffering the consequences. What regulations do you propose should be placed on these companies, specifically their advertising?

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