January 28, 2023


The Lies of Multi Level Marketing

In an article by Robert L. FitzPatrick, the president of the Pyramid Scheme Alert and co-author of  False Profits: Seeking Financial and Spiritual Deliverance in Multi-level Marketing and Pyramid Schemes, he offers some insight into the lies that multilevel markets generally produce to justify their work ethic.  The first lie he lists is that “MLM is a business offering better opportunities for making large sums of money than all other conventional business and professional models.”  He then provides historical evidence to show that multilevel markets almost always result in a losing financial proposition.  A great example of this is the 1995 case of Excel Communications, a former MLM giant.  The company reported to regulators that it had an 86% turnover rate of distributors and 48% drop-out rate among all customers.  This ties into how these markets tend to classify their distributors as “active” and “inactive” to obscure these dismal numbers.  The payout and investment portfolio records are then only disclosed to the “active members” to keep these discrepancies out of the public eye.  

In the same article, FitzPatrick examines the strategies and schemes used to make multi level marketing seem appealing to potential investor recruitments.  This is done by numerous forms of fortifying rhetoric and experiences.  These types of companies will hold recruitment meetings in lavish destinations with top notch service to the potential investors.  They associate the wealth and comfort that they experience during these meetings with what they “can earn” if they become a part of the recruitment process. These meetings are strategically engineered to psychologically fortify the company’s model within the minds of the recruitments and can have an intoxicating effect on the individual.  Multi level marketing can present itself to the investor in the most sneaky, methodical ways in order to appeal to the wants and goals of the investor.  

Another misconception that arises from this system is that “friends and family are guaranteed to be lifetime customers and support” if an individual chooses to be a distributor for one of these markets.  This is another methodical tactic used to recruit more and more individuals which results in the infectious spread of investor recruitments.  If one person becomes involved with a multi level marketing opportunity, they are likely to recruit those closest to them; friends and family, to become investors below them in order to meet their recruitment quota.  This results in the involvement of more and more people, spreading like a contagious disease from person to person.  

Another lie that is listed in FitzPatrick’s article is that multi level marketing presents an opportunity for personal freedom and human growth.  FitzPatrick states, “MLM marketing materials reveal that much of the message is fear-driven and based upon deception about income potential. Solicitations frequently include dire predictions about the impending collapse of other forms of distribution, the disintegration or insensitivity of corporate America, and the lack of opportunity in other professions or services. Conventional professions, trades and business are routinely demeaned and ridiculed for not offering ‘unlimited income.’ Employment is cast as wage enslavement for ‘losers.’ MLM is presented as the last best hope for many people. This approach, in addition to being deceptive, frequently has a discouraging effect on people who otherwise would pursue their own unique visions of success and happiness. A sound business opportunity does not have to base its worth on negative predictions and warnings.”  This shows the ethical holes involved in manipulating the human brain to build a corporate giant.  It is not morally, or ethically sound to take advantage of individuals’ want to achieve success.  It is a violation of business ethics and should not be classified as a legal practice in the United States economy.

Multi-Level Marketing and its Uncanny Resemblance to the Pyramid Scheme

In business, there exists a competitive craving to be smarter, faster, and bigger than everyone else. This urge stems from the initial experience of success that has the ability to intoxicate people. If success isn’t approached with correct moral and ethical judgement, this infatuating addiction can prove harmful to the parties involved. This is how notorious and successful businessman Bernie Madoff became involved with one of the most systematically thought out forms of stock fraud; otherwise known as the pyramid scheme. This scheme works exactly as it sounds; like a pyramid. The top investor recruits individuals who will “make money” beneath them if they promise to recruit more investors that will “make money” beneath them, and so on. This scheme works and eventually makes a never ending pyramid of investors that only make money if they recruit more and more investors below them, however the issue is that the pyramid can’t go on forever, and there will be investors sitting at the bottom of the pyramid who will fail to make any money at all while the few people sitting at the top of the pyramid will make exponentially increasing sums of money that stem from the empty promises of the bottom level investors. This practice has now been criminalized and landed Bernie Madoff the title of one of the most notorious criminals in history as well as a 150 year sentence to federal prison. This is where the concept of multi-level marketing comes in. This business concept begins with few individuals who have a product that they want to sell. They then recruit a larger group of individuals below them to sell that product. This group of individuals then recruits more sellers below them and the cycle continues on and on while the original sellers make more and more money. In short, the largest group of sellers at the bottom of the scheme end up with a closet full of products that they are unable to sell while the individuals above them make copious amounts of cash. This business scheme holds an uncanny resemblance to the investment scheme discussed earlier. The only difference is that only one of them is considered illegal in the eyes of the Internal Revenue Service. So if these two business schemes are essentially the same thing with different labels, what is it that separates them in legality?

I found the information very useful in this article by the Better Business Bureau.  The hyperlink provided will take you to my annotation of the document.  It blatantly states the red flags of multi level marketing schemes that closely resemble the pyramid scheme, or Ponzi Scheme.  I found it intriguing how close the qualifying criteria for legal and illegal forms of this marketing seem to be.  This article sparked inquiry about how companies can find legal loopholes to disguise unethical marketing schemes as enticing financial opportunities that comply with legal business regulations.  I believe this document shows how easy it is for corporations to advertise misleading and many times, fruitless schemes to recruit individuals into their market.  The article does state that not all multi-level markets are to be considered “scams,” however many of these product distribution corporations fall into the notorious category.  

I found another article very intriguing.  This government document gives an overview of how certain corporations target young marketing and finance students as recruitment candidates for their products.  It provides numerous guidelines for these students to see if they are being recruited into legitimate market opportunities and not fraudulent organizations.  It examines the risk involved with these types of sales positions and the precautions that should be taken before considering them.   I found this very helpful in showing the main demographic that is at risk when it comes to these types of schemes.  

I am looking forward to researching more on this topic and examining what it is that makes these schemes fall on the spectrum of legality in the eyes of the IRS, and United States Corporate Law.