- Interview by
- Luke Savage
So-called multilevel marketing (MLM) schemes have been around for decades, and for almost as long as they’ve existed, they’ve carried a pungent whiff of fraud. But as author and longtime MLM expert Robert FitzPatrick argues, the industry has only grown in size and influence since its inception — remaining a poorly understood and criminally underregulated enterprise that generates billions in revenue every year while scamming countless Americans.
As FitzPatrick notes, MLM has eluded not only the wrath of law enforcement, but also the scrutiny of investigative journalists and the critiques of progressive advocacy and activism — despite extracting billions of dollars from millions of people each year and well-established ties to the political right.
Jacobin’s Luke Savage sat down with FitzPatrick for a wide-ranging conversation about the history, scale, and structure of MLMs, and why there’s no such thing as a legitimate MLM.
Before the interview, you argued to me that “MLM is so reflective of prevailing cultural systems, dogmas and economic structures, that it remains largely unexamined, almost invisible, even though just a cursory study reveals an extraordinary fraud on a global scale, disguised as legitimate business.” So, let’s begin by laying out some basic terms of reference. I think plenty of people have an extremely general sense of what multilevel marketing is, but many are unaware of the fine details — and of how opaque the term ultimately is. How does multilevel marketing work? How is it officially defined, and how do you define it?
Well, I define it as a cultic racket, and I use the term “Ponzinomics,” which I think captures two basic realities of multilevel marketing. One, that it’s a pyramid scheme; that’s its model. That’s how it swindles people — using the classic money transfer, closed-market pyramid scheme: People come in and give their money; the money goes to people who came in earlier; the newest people have to bring in other people in order to recoup and gain the promised income. That’s the classic pyramid scheme. It’s basic fraud. The second part of it, though, is that it has become, since its inception — and we are talking about an identifiable economic movement with structure and leaders, not something that evolved out of nothing; it was invented at a specific point in time, 1945, it operated for about fifteen years, and then it morphed into another stage in the ’60s — it became a belief system and an actual ideology. It has become a cult itself, with a cultic mindset and a kind of belief system that is all-encompassing. It was pseudo-economics. It had moral overtones because the two leaders who turned it into a cult were these very pious, devout, and extremist Christian Calvinists — Richard DeVos and Jay Van Andel of Amway.
So, my take on MLM, as far as public understanding of it goes, is not that there are nuances to it that have escaped people, but that the fundamental reality has been covered up and replaced by a myth and a disguised operation. It’s not that the average person understands some but not all of it, but that mostly, what they think they understand is actually a propaganda story that’s completely false. The two things they’re told are, one, that it’s an income opportunity. Well, my God, we all need income opportunities right now, more than ever in our history. I mean, I’m old enough to remember when coming out of school, there were income opportunities everywhere. They were called jobs and careers, and they were plentiful and they were promising and interesting (and of course, they have diminished).
The second identity that it claims is “direct selling.” Direct selling has products, people buy the product, and then supposedly sell it. But, again, with a little bit of common sense, with a little water splashed on that. . . . Who could make a living selling products from their home by themselves in the twenty-first century, selling against Costco, Amazon, Walmart, or any online retailer? Who has time for somebody to be in your home, pitching you on a product? Who needs a salesperson for such a thing? Actual direct selling had died by the ’70s and was pretty much all gone as a business model. Direct selling is actually extinct. MLM assumed its old identity, which still lingers in the cultural memory as a paragon of personal initiative.
On top of all that, the particular way multilevel marketing is designed couldn’t be direct selling. Let’s say I sign up and can now sell this anti-aging cream to all my friends. But then I find out the company has basically recruited all my friends, and they’re salespeople too. And they advised me to go talk to my friends and sign them up. But wouldn’t they become my competitors? So, it isn’t direct selling. That model is obsolete. What it actually is, when you get into it for five minutes, is a recruiting scheme. You can’t make money selling. You recruit. And as part of the recruiting, the recruit must buy. That’s not a sale, because I added something to the transaction that I can never deliver. I add to it that you’re going to make money when you join. You won’t, and that’s by design.
The income opportunity component requires a little more study. But that too is in total violation of how direct selling, or indeed how all selling, works. If you look at the pay plan in these schemes, it’s very complicated. I’ve had reporters call me and say, “Help me understand the pay plan. I just can’t quite get it.” And, as I said, you won’t get it. You’re not supposed to get it. It has too many variables for you to possibly understand it. Nobody could, but I think you notice one thing immediately without going through all the ranks and the titles and the percentages and all of these qualifying rules and so on. It is this: When the last person in buys the product, there’s an amount of money that they pay, let’s say a hundred dollars. And out of that hundred dollars, there’s going to be a percentage that’s allocated to the recruiting chain.
But the way they allocate it is that the majority of commission dollars — it’s usually about 40 percent of the total price — is going to go up the chain, but the majority of that 40 percent goes right to the top, not to the person that recruited you. In real sales, it’s the opposite: The person who makes the sale gets the majority of whatever total amount of commission is allocated on that transaction. So, you can’t make money. You couldn’t even make money from selling. Instead, you have to recruit recruiters who recruit recruiters! You have to get to the top before you can actually make money on those types of transactions. So, you must recruit. Of course, only a tiny percent can be at the top, so all others are doomed to lose.
So, that’s the way I identify multilevel marketing. It’s a cultic racket that has embedded itself in our economy, disguised as direct selling and an income opportunity and protected by government through corruption and lobbying — and ignored, even by the Left, as a destructive economic and social force.
The Multilevel Octopus
I think it would also be worth giving people a scale of MLM as an industry and the landscape of regulation in relation to it. In recent years, there have been high profile examples that people may well have heard of. Herbalife Nutrition is one obvious example, LuLaRoe — which was featured in a recent documentary in which you appeared — is another. How extensive is the MLM enterprise beyond these better-known examples?
I’ve been tracking it since the early ’90s. It’s gotten vastly larger by multiples, even in the United States, over that period of time. But more importantly, it has spread globally. It’s in 170 countries. We’ve estimated that the total revenue these schemes have generated is over a trillion dollars worldwide — not annually, but it’s around $200 billion annually. Someone in approximately one in six or seven households in the United States is engaged in one of these schemes. I know this, too, because I can’t meet anybody who hasn’t had this kind experience. Everybody I know has had an MLM experience.
Just anecdotally, I know this thing is pervasive, almost universal now. Except I’ll tell you one group where seemingly the least number of people are affected: journalists. Journalists, I find, are the least affected people. And I’m not sure why that is. It may be that recruiters know not to contact them. It may be that they are insulated from this sort of thing. They tend to be critical thinkers, questioners, or skeptics. But, as a consequence, often many journalists who are assigned to go question this thing, start from a premise that it is some kind of marginal and not very significant phenomenon consisting of silly, naive people. But I’ve been involved in court cases involving these schemes where the primary or the highest profile victims were quite literally players in the NFL.
Every group has been targeted by these schemes: African Americans, Orthodox Jews, Muslims. There are no exceptions there. This is affinity fraud, so it spreads easily. People know each other, and someone tends to join because the recruiter looks like or is known to them. It is literally pervasive in the grassroots of the United States. I used to wonder: Why in the world aren’t there documentaries on this? I’ve talked to many documentarians about it, and they all give up. They say, either they can’t get money, or they can’t get their arms around the subject. Or they don’t think the subject itself is interesting enough to market to funders.
I also encountered this with my book Ponzinomics. I had a very good agent in New York. We went to major publishers, and we had a lot of interest from younger editors with the book, but we couldn’t sell it. Academia also does not touch it. Incidentally, there are hundreds of academics that have a relationship with the Direct Selling Association, and they get money and grants and things to give legitimacy to this. So, publishing, media, academia, and also government regulators have been suppressed around the MLM enterprise. It operates invisibly as a huge loop and is huge dollar-wise, number of people–wise, and is growing. It was spreading when COVID-19 came, and it got a huge boost because we suddenly had millions of people furloughed from their jobs and sitting at home quarantined, and then they go online, and there it is.
Since you just mentioned regulators, I wanted to ask: How, if at all, is multilevel marketing regulated?
When we’re speaking about pyramid schemes, we’re not talking about anything that’s lawful. Nowhere in the world are pyramid schemes treated as lawful or legitimate financial enterprises, so it would be normal for law enforcement to be involved. And they were, historically. I tracked this in the book. These things started and were disguised as direct selling enterprises, but they immediately attracted the attention of the US Food and Drug Administration, because the very first multilevel marketing company was prosecuted for selling snake oil (in this case, a so-called vitamin pill that claimed it would cure virtually everything). They get prosecuted for that, but it wasn’t until the mid-’60s that regulators began looking at the business model itself, the recruiting scheme, and began examining it for fraud.
But they discover right away that there are similar companies, or seemingly similar companies, called direct selling companies that still existed at that time. So, they didn’t want to sweep them into the law. They discovered there is no federal law in the United States (and there still isn’t today) against pyramid schemes. There’s no law that specifically uses the phrase, but some state laws were written in the ’60s and into the ’70s that attempted to outlaw this method of selling. And they tried to thread a line between this type of scheme, which is really a recruiting scheme, and an actual direct selling business.
That’s the dilemma that regulators faced. But right from the start, the first major scheme, which would be Amway, became a major political force in the country. The government did try to shut down Amway in the ’70s, but Amway subverted that prosecution at the highest level of government with the president of the United States, who was then Gerald Ford, taking his largest contribution from the Amway families. They funded his library, his museum, and he later became a spokesman for them. His secretary of state became a consultant. They actually met with him at the White House while the Federal Trade Commission (FTC) was trying to shut down Amway.
You had Richard DeVos, who was very heavily involved with the Republican Party, and his partner Jay Van Andel was at one point chairman of the board of the US Chamber of Commerce. So, between these two spheres of influence, they really suppressed prosecution. This is not anything subtle. This is old-fashioned insider corruption, bribery, lobbying, and influence peddling that has prevented the government from regulating as a consequence. Nobody really actually oversees. There’s no data gathered on multilevel marketing. There’s no federal law that is specific to pyramid schemes, and it’s instead been relegated to the Federal Trade Commission.
And this is important because it treats multilevel marketing as merely a business practice. They took a very generic term out of the Federal Trade Commission Act called “unfair and deceptive trade practice” and said, “Well, a pyramid scheme would be that, so we’ll regulate it.” But they start from the premise that multilevel marketing is legitimate and offer a definition of what a legitimate MLM looks like that has never actually been identified in the real world. Now, you can draw a picture of a unicorn. You can believe in a unicorn if you want to, but that doesn’t mean they exist. And that’s what the FTC did: It created a legal unicorn that it calls “legitimate” multilevel marketing.
Is it regulated differently in other jurisdictions? Are there countries where this kind of practice is illegal or treated as fraudulent?
Well, this is why I called it a racket and why I felt that this thing couldn’t really be grasped until someone laid out the history and asked how it spread and accrued this much power without being shut down — particularly given the consequences for most people involved in these schemes. 99 percent never earn a penny. It’s a tremendous loss, even aside from the social disruption caused. But if you track it, you immediately find it got a tremendous political fix here in the United States. Then, with that political protection of the US Department of State and the US Department of Commerce, it entered all these other countries, and it did it right through the World Trade Organization. So, it is protected wherever it goes. And yes, there are other countries that have investigated it, but they never prosecuted either because it is huge here in the United States.
I mean, the Department of Education, all our US schools, was until recently headed up by Betsy DeVos, who is the wife of the CEO of Amway. So, is some country in Asia going to say, “That’s illegal here”? I was invited to attend a conference in Sri Lanka that brought together central bankers from Sri Lanka, Bhutan, the Maldives, India, and Bangladesh, and they were plagued by multilevel marketing. Sri Lanka’s currency was even attacked by a scheme that was selling gold coins, which was pulling the currency out of the country and devaluing it. So, they became very alarmed by this. But they had no law and asked me to help them write one. But privately, people came over to me and said, “We’d love to ban the whole thing, but we don’t dare. It’s protected by the World Trade Organization and the US Department of Commerce, and if we try to do something, they would get on the phone and tell us to leave it alone.” So, this is a global racket that enjoys substantial political protection.
I realize this is a big question. But supposing you had a legal or a legislative magic wand, what would you change about the current landscape vis-à-vis MLMs and how they’re regulated?
I don’t think there’s a legislative solution needed. If what is going on is as I’ve described, and I don’t think it requires too much effort to validate my account of things, the structure itself can be easily analyzed. It’s neither an income opportunity nor direct selling, so what is it then? Well, we have laws against fraud. We have laws against racketeering. So, in my view, the only thing really needed is just to take the handcuffs off law enforcement and let them go look at it and do their jobs. And we have adequate laws.
I attended the trial of Paul Burks, CEO of an MLM called ZeekRewards. ZeekRewards only lived about two and a half years, and in less than a year and a half raised $600 million from over a million people. This little scam operated out of Lexington, North Carolina, and it shows you again how powerful the schemes are and how receptive the public is to them, presuming they are real businesses because that’s what they’re told. But this one came a little too close to presenting itself as a security or a financial commodity. You could buy in, and then you could get these credits, and then what you had paid suddenly rose in value.
Anyway, it ended up being prosecuted by the Department of Justice. US attorneys filed criminal charges against the CEO, and he argued he was doing legitimate multilevel marketing. He brought in about ten consultants to attest that it was real multilevel marketing and claimed he was like Amway, but the jury didn’t buy it, and after about two and a half hours they gave him three concurrent sentences. I talked to the US attorneys there and noted they didn’t actually prosecute the case as a pyramid scheme. They essentially told me what I already knew, which is that we don’t have laws against pyramid schemes in the United States.
They said it’s very difficult to prove a pyramid scheme, but what they do is criminal. They deceive, and they harm, and they do this deliberately in a calculated manner. That’s called fraud, and we have laws against criminal fraud. That’s the law that was used here. So, why is this one different from the other 700? The attorneys had no answer for that. That case is the model though. And this is the same thing you see in relation to all kinds of white-collar fraud. It’s rare that corporate criminals are ever prosecuted criminally.