An Open Letter to Congress on H.R. 5230

Dear Member of Congress:

Before acting on H.R. 5230 I urge you to consider the following factual points about pyramid schemes. Each point below can be documented and the evidence dates back decades. As an educator and expert witness, I have taught business courses to undergraduate and graduate students, and assisted government prosecutors in closing pyramid schemes. I believe that successful businesses are vital to our nation’s economic and social well being, and that entrepreneurs energize and revitalize local and even global economies. I also have seen the grave damage caused by pyramid schemes.

Here is what can be documented about pyramid schemes:

• They do great financial and social harm, involving tens and even hundreds of thousand of victims, many millions of dollars, and drive emotional wedges between friends and family members.
• They must use fraud to grow and sustain the scheme. The fraud is perpetrated through face-to-face communications, earnings claims and other company-generated documents and websites. The lack of independent, publicly available information about the opportunity prevents verification and permits overt and covert misrepresentations.
• They can last for many years – in two recent cases (Fortune Hi-Tech Marketing and Vemma) the companies operated for ten years before FTC action.
• They are recruitment driven and lack what the BurnLounge court called “consumer demand” and what the Vemma court called “customers” outside of recruitment-based purchasing.
• They use recruitment-based product purchases and/or fees to generate the funds that compensate upline distributors, whose financial rewards hinge on sustaining a cycle of ongoing recruitment.

Here is what can be documented about the prosecution of product-based pyramid schemes:

• After Amway ’79, every multilevel marketing (MLM) company that faced a formal FTC pyramid scheme charge has either ceased operations in the face of litigation or lost in court after a trial on the merits.
• Courts have roundly criticized experts defending MLM companies in FTC cases as being ineffective and unable to defend the business model as practiced.
• Completed cases take many years, absorbing significant FTC resources and yet always reaching the same conclusion.
• Individual members of the Direct Selling Association (The Direct Selling Association (DSA) is the national trade association for direct selling companies.) have actively defended MLM companies prosecuted by the FTC, including cases where the court subsequently found the company to be a pyramid scheme.
• Company members of the DSA have closed their operations in the face of FTC action.

Here is why H.R. 5230 (the Bill) will reverse decades of case law and essentially protect product-based pyramid schemes from prosecution:

• The Bill eliminates the purpose of direct selling as a form of retailing by removing the need for customers external to the recruitment process. MLM representatives can simply sell the idea of joining an income opportunity, as opposed to actually operating their own retail business.
• The Bill implicitly recognizes the MLM parent company as the sole seller in the business model, as a churning base of recruits—the financial life of the company—purchase directly from the parent company.
• The Bill reverses the precedent of the 1979 Amway safeguards, company policies seeking to ensure retail sales by distributors to customers outside of the distribution network.
• The Bill codifies permission for purchase and recruiting behaviors the courts have already identified as endemic to illegal pyramid schemes.

Industry-sponsored bills have long been part of our federal legislative process. However, the MLM industry and DSA have published statements that undercut their legitimacy in this regard. Admitting publicly to the existence and harm of pyramid schemes, the industry has nonetheless long resisted regulatory oversight. Despite recognizing that pyramid schemes can effectively disguise themselves as legal MLM companies, via this Bill the DSA supports efforts to make identifying pyramid schemes even less likely. Rather than seeking clarity, fear of greater transparency appears to be driving the industry to sponsor and support H.R. 5230. I urge you to stop H.R. 5230 from becoming law.

My opinions are independent, based on my own research and experiences. Except for a current pyramid scheme prosecution that I am assisting, I have no financial ties to any individual or organization that criticizes or supports the MLM industry or any MLM company.

Sincerely,

William W. Keep, PhD
Dean, School of Business
The College of New Jersey

The views, opinions, and positions expressed in this blog post do not necessarily reflect the views, opinions, and positions of TINA.org.