The Mess Called Multi-Level Marketing With celebrities setting the bait, hundreds of pyramid-style sales companies are raking in millions, often taking in the gullible.
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Those ads and dozens of come-hithers like them are probably spicing up your hometown paper these days. For that matter, they have been running in a national newspaper, as well: USA Today recently published 55 such ads in a single day. Its far-flung audience of 1.5 million is a natural target for the organizers of multilevel marketing companies -- MLMs for short. They are companies whose secondary business often is selling products but whose primary goal is signing up thousands of salespeople who pay for the privilege of signing up even more salespeople -- in hopes of sharing in their commissions. For years, the industry was largely the province of soap and vitamin peddlers. Today, MLM companies sell everything from no-run pantyhose to long-distance phone service. By some estimates, MLM sales are growing 30% a year and now top $20 billion. That's about half the annual sales volume of Sears. Bobbing in the wake of the multilevel boom, however, are thousands of people who have been scarred or ruined by their encounters with MLM companies. Consider: -- Last year, more than 100,000 people took the advice of Chris Evert, New York Met Gary Carter, San Diego Padre Steve Garvey and other athletes and signed on as distributors for United Sciences of America (USA), a new nutritional-supplement MLM. For a few months, they sold millions of dollars worth of USA's Fiber Energy Bar, Calorie Control Formula ersatz milk shake, Master Formula vitamin tablets and Formula Plus fish oil capsules. But some product claims were unproven and sales began to dwindle. Enforcement authorities then filed lawsuits ordering USA to change its marketing plan and sales claims in their states. USA filed for bankruptcy liquidation in March. (For more on the rise and fall of USA, see page 140.) -- Would-be distributors with visions of millions dancing in their eyes have instead found themselves scrambling to sell as much as $24,000 worth of products a year to eke out minimal multilevel commissions. No matter now much a person sells, after deducting MLM-related expenses, profits can often be negligible. Some distributors have had to move out of their homes and rent them out when MLM losses wiped out their ability to make mortgage payments. -- The Texas attorney general estimates that that state's residents last year lost $300,000 to $400,000 to Starcom, a now defunct MLM long-distance phone company. These are just a few examples of people recently victimized by a sales technique gone haywire. The horror stories could fill volumes as multilevel marketers continue writing new chapters daily -- largely unchecked by federal or state regulators. ''By the time we get complaints, the company founder is usually gone,'' says Fred Hochsztein, an assistant attorney general in Florida. Money spent three months investigating the multilevel marketing business. We interviewed dozens of multilevel founders, salespeople, customers, state and federal enforcement officials and lawyers. Our conclusion: while some multilevel firms are legitimate, scores of them are not. Every day, unscrupulous founders of multilevel companies prey on some of the most gullible -- and often most financially troubled -- people in our society. Simply put, multilevel (also known as network) marketing means a company sells its products or services through layers of distributors, each usually composed of fewer distributors than the layer beneath it. A distributor earns commissions, also called overrides or bonuses, based on both his sales and those of distributors below him. Unlike franchises, which usually require large up-front fees, it generally costs as little as $10 to $50 to buy an MLM sales kit and become a distributor. But then a distributor can easily shell out hundreds or thousands of dollars for such things as phone calls, hotel ballroom rentals, brochures, applications, postage and advertising. For decades MLM has been an uneasy domain of illegal businesses, called pyramid schemes, and more conventional pyramid-style companies whose goods are sold in homes, at meetings or through the mail. Legitimate MLM pyramids are made up of distributors who make money primarily from their product sales and those of people beneath them. Such companies include Amway, the Ada, Mich. company that sells everything from vitamins to long-distance telephone service; Shaklee, which sells vitamins, nutritional supplements and personal- care products; and A.L. Williams, by some measures the nation's largest seller of life insurance. There is no federal definition of a legal MLM company, however. The closest thing is a 1979 Federal Trade Commission ruling that determined Amway was not an illegal pyramid scheme. Reasons: it did not pay distributors to recruit people, its distributors had to sell products to get bonus checks, and the company was committed to buying back its distributors' excess inventory. But other MLMs are clearly illegal pyramid schemes. Distributors make money primarily by collecting fees for signing up new distributors who in turn can get fees by bringing in still more. Most MLMs fall somewhere in between the extremes. Legality therefore becomes a matter of interpretation for state attorneys general, the U.S. Postal Service, the Federal Trade Commission and the Food and Drug Administration. Even some of the legal MLMs make deceptive or unethical claims to lure distributors and customers, says Jeffrey Babener, a Portland, Ore. attorney who specializes in multilevel law. Frequently, the companies fail to disclose the expenses and effort required to make steady money in MLM, as was the case in many of the dozens of MLM mailings and sales brochures read by Money. For example, one distributor for an MLM buying service called Unimax, based in Schaumburg Ill., claims in his sales materials: ''You can look forward to an automatic monthly income of up to $104,364.72.'' But, concedes Unimax president Tim Dern: ''Nothing is automatic. It's all based on effort. If you brought in 29,523 people in one month you could earn $104,000. But the probability is very slim.'' The possibility of earning millions as an MLM distributor is alluring but unlikely. To do so, a participant generally must build a network -- known as a downline -- of thousands of people, and the distributors and customers must keep buying products and services. Amway's sales materials say its active distributors earn on average $76 a month. Multilevel marketers often feed on at-home distributors who become MLM junkies, hopping from one company to the next or selling for several MLMs at once. Says Lloyd Case, a multicompany distributor in Jackson, Miss.: ''I started a multilevel portfolio for 1987, selecting the staple items to sell: gold, major-medical insurance, the Bible, telephone service, banking, mortgages, auto leasing and health products.'' Phillip Gibson, an assistant attorney general in Missouri, says he thinks larger numbers of aspiring entrepreneurs are turning to MLM to avoid the high start-up costs found in other ventures. ''How else can you start a business for only $29.95?'' asks Clifton Jolley, president of Avenues Communications, an MLM consulting firm in Salt Lake City.
Eileen Silva, 39, a Modesto, Calif. high school guidance counselor, first became an MLM distributor in 1984 with Future Lines Sportswear, selling athletic garb and gear. Silva signed up roughly 80 other distributors, mostly friends and relatives. She stayed with Future Lines for 10 months until, she says, it went bankrupt; she lost several hundred dollars. ''After all,'' she asks, ''how many tennis racquets do you really need?'' Silva was discouraged, temporarily: ''I stayed out of the multilevel business for some time. It was at least four months before I got in the next one.'' In November 1985, she joined Family Business Network, a vitamin and skin-care MLM. Silva says the company suspended operations in April 1986. Again, she says, she lost several hundred dollars. Last August, Silva became a distributor for Unimont, a West German company with ''the most lucrative marketing plan I've ever seen.'' A Unimont distributor earns 29% on all personal retail sales, before expenses, and can conceivably receive a one-time bonus of about $110,000 for signing up 26 high- volume distributors and producing, with them, a monthly sales volume of roughly $260,000 for six consecutive months. Silva will not say how much she earns for Unimont. She claims in sales literature she wrote that among Unimont's 100 or so products, its $39.50 skin treatment ''reverses wrinkling'' and its $15 special water ''gives you more energy and stamina.'' Her evidence: assurances by the creator of the product. Silva hopes to quit her counseling job within two years to become a full-time MLMer and aims to earn $1 million through Unimont within several years. ''If this company can't make it, nothing will,'' says Silva.
Most MLMs recruit new customers and distributors by holding motivational business opportunity meetings -- sometimes called sizzle sessions -- in hotels or homes. There, distributors often speak not of selling products but of ''sharing'' them with others. The newer MLMs deliver nationwide opportunity meetings through television shows, VCR videotapes and satellite-broadcasted powwows. One videotape making the rounds is of a recent hotel meeting to recruit distributors for FibreWeigh, an MLM weight-loss company based in Farmingdale, N.Y. On the tape, several audience members step up to the microphone, saying they lost 30 to 40 pounds each through FibreWeigh's regimen of nutritional milk shakes, fiber biscuits and vitamins. Cost: $80 a month. The audience roundly cheers each testimonial. Another such high-tech MLM is A.L. Williams. The company sold $76 billion worth of term insurance last year -- the only type Williams offers. In 1985, the latest year with comparable figures, Williams sold more insurance than the nation's second and third largest life insurers, Prudential and State Farm, combined. President Art Williams holds a weekly pep talk by satellite hookup, speaking to salespeople and prospects across the country. At a March rally Williams wore an i ain't average sweatshirt and stirred up the troops for 45 minutes. Williams, who sits at the top of his 155,000-person sales force's pyramid, said his company ''will make you stone wealthy.'' In the past few months, several MLMs and independent producers have aired half-hour cable-TV shows -- actually commercials -- nights and weekends on the Lifetime, USA and Black Entertainment networks. The shows include Person to Person Magazine, Network for Success, Networking Your Way to the Top, Tradevest Today and Money Tree. Some shows always tout one particular company and its products; others feature different MLMs on different broadcasts. A few months back, many of the same time slots were filled by TV pitchmen selling no-money-down real estate courses (see ''The Beguiling Gurus of Get Rich TV,'' Money, April 1986). In fact, a few of those same people have switched from real estate to MLM. Tony Hoffman is host of Networking Your Way to the Top. Tim Hawthorne, who formerly ran the TV division for Ed ''The Millionaire Maker'' Beckley, now produces Network for Success. Sometimes an MLM company pays to be featured on one of the shows -- $25,000 for a Person to Person Magazine appearance, for instance. In other cases, such as Network for Success, a group of distributors pays to produce its own commercial. When viewers call the toll-free number flashed on the screen to sign up as distributors, they become part of the producers' sales force automatically. Multilevel marketing started on a much smaller scale back in 1945, when Californians Lee Mytinger and William Casselberry -- a former cemetery-plot salesman and a psychologist -- invented a new marketing plan for the Nutrilite company. Nutrilite sold green tablets and red capsules that were made of alfalfa, watercress, parsley, vitamins, minerals and yeast. Cost: $19.50 for one month's supply of 279 vitamins. The Nutrilite marketing plan, now the model for many MLM companies, worked like this: A Nutrilite distributor bought his supplies from Mytinger and Casselberry at a 35% discount. The distributor earned a monthly bonus of as much as 25% of his monthly sales volume. When he lined up 25 customers to buy a month's supply of Nutrilite (many became distributors), he was made a sponsor. Then, his customers and distributors bought Nutrilite directly from him. He made a 35% profit on sales to customers and as much as 25% of sales from distributors working below him. When he and his distributors amassed 150 customers, he became a key agent at the top of his pyramid. Once his distributors became key agents, he got 2% of their sales. Mytinger and Casselberry cleverly realized the four advantages of MLM: 1) Since the business relies on word-of-mouth sales, an MLM company can save on marketing and advertising costs. 2) By touting the exclusivity of its own products, an MLM can charge far more than similar products sold in stores. 3) MLMs can develop loyal customers who enjoy buying from other people they know. 4) MLMs can motivate salespeople with higher commissions on increased sales. In the late 1950s, two MLM companies were created that have since become the industry's giants: Shaklee and Amway. Shaklee is now a publicly traded firm ($398 million in sales), known mostly for its vitamins. Amway started in the Ada, Mich. homes of two Nutrilite distributors, Rich DeVos and Jay Van Andel, who developed a cleanser and laundry detergent. Their company grew and, in 1972, bought out Nutrilite. Amway's 1986 sales were $1.3 billion, largely from its 1 million-plus distributors in more than 40 countries. Amway's future plans include offering mortgages and selling mutual funds and credit cards. As sales from the thousands of multilevel companies have grown, so have the legal bouts with federal and state regulators. In fact, some executives, sensitive to the association of MLM with illegal pyramid schemes, now bristle at the suggestion that they work for a multilevel business. Speaking at a recent A.L. Williams satellite hookup, national sales director Bill Anderton shunned discussion of recruiting. ''It has the multilevel marketing image I don't feel comfortable with,'' he said. ''We call it associate development.'' The most celebrated legal cases involved promoter Glen Turner in the 1970s. The FTC found him guilty of unfair and deceptive practices with his cosmetics MLM, Koscot Interplanetary. The Securities and Exchange Commission stopped Turner from selling his ''Dare to Be Great'' motivational courses, calling them unregistered securities. In the past year, attorneys general in more than 10 states including California, Florida, New York and Texas have shut down dozens of lesser-known MLMs in their jurisdictions as illegal pyramid schemes. The U.S. Postal Service has issued hundreds of cease and desist orders to illegal multilevel companies using the mail to recruit distributors and customers. The agency charged the MLMs were illegal lotteries. One recent and typical tangle involved an illegal pyramid scheme known as the International Bank of Roseau. The bank, based on the Caribbean island of Dominica, was an MLM whose operations were halted in Florida and Iowa last fall. According to court papers filed by the Florida attorney general, a person who paid $300 received a ''short course on international banking'' and became a sales agent for the bank. He earned one point for each person he signed up to pay $300 to the bank for the ''banking course.'' Each participant could recruit six people. Then, each of those could sign up another six and so on, down nine levels of the pyramid. When someone earned 10 points, he was entitled to a $1,000 loan that he would not be required to repay. But he received only $900 immediately; the bank put the other $100 in a 10% CD maturing in 41 years. If a distributor signed up more people, he qualified for even bigger loans. Someone who brought in 30,000 people could conceivably qualify for a $1 million loan, one of the bank's salesmen told an agent for the Federal Bureau of Investigation. The bank did not provide evidence that anyone recruited 30,000 others, says Fred Hochsztein, an assistant attorney general in Florida. Samuel Shapiro, a statistics professor at Florida International University in Miami, analyzed the plan for the Florida attorney general. He determined that all of those entering on level 9 of the pyramid would qualify for $1,000 loans only if together they signed up the equivalent of every living soul in the United States, Canada, the Netherlands and Mexico -- a total of 362.8 million people. Because an MLM, unlike most sales companies, usually has no territorial limits on its sales force, a tiny company can go national literally overnight. That can create serious legal problems for companies and distributors because state laws on multilevel marketing differ dramatically. In roughly half the states, MLM companies must follow local business opportunity laws specifying that someone can become a distributor only by making an investment aside from purchasing a sales kit. In Virginia, $25 qualifies as an investment; in Utah, it's $500. Says Jeffrey Babener, the MLM lawyer: ''Given the inconsistency in state and federal laws as well as the inconsistency in enforcement activity, it is really impossible to give a legal stamp of approval to any MLM program.'' Nevertheless, some MLM distributors tell prospective customers that their companies are approved by state attorneys general. One distributor, LaDarana ''Whitey'' Mees of Bismarck, N.D., allegedly did just that. He was charged in August with committing a felony because the North Dakota attorney general said his MLM, a long-distance phone company called Independent Communications Network, was an illegal pyramid scheme. Babener advises MLM operators not to cite earnings figures of distributors in their sales materials. Nevertheless, many MLMs and their distributors do. They frequently dazzle prospects, noting how much you could potentially earn or the most a distributor has earned in one month, rather than what their distributors actually earn consistently. Some people have achieved millionaire status through MLM, however. Two who say they did are Chuck and Jean Strehli, full-time Amway distributors in Austin, Texas. They attribute their success to 22 years of hard work running Amway sales meetings, training distributors and keeping their customers satisfied. ''We've earned over $100,000 a year through Amway since our seventh year in the business,'' boasts Chuck. The Strehlis have achieved Amway's highest status, ''Crown Ambassador,'' by filling a downline with thousands of people in more than 20 countries. (A large painted crown appears on the bottom of their swimming pool.) The couple say they savor the independence Amway provides them. ''You're not held back by anyone,'' says Chuck.
A serious problem for someone interested in becoming a legitimate MLM distributor is getting accurate, unbiased information. MLM sales literature often claims that 20% of American millionaires made their millions in multilevel marketing. After months of interviews, Money could find no one able to document the 20% figure. Then there is the United Networking Association (UNA), a self-described watchdog group for multilevel marketers formed last fall. Its chairman is Tony Hoffman, a former TV real estate pitchman. Until April, the UNA was also a for-profit multilevel marketing company. Hoffman's TV sidekick, Bob Braun, asked on an audio cassette designed to enroll new UNA members, ''Can you imagine how much money could have been made if the Board of Realtors had been set up as a multilevel marketing company?'' The operation worked as follows: When the UNA endorsed another multilevel company, the MLM's distributors were subsumed into the UNA. A UNA member paid $396 a year to belong, entitling him to a monthly newsletter and monthly audiotapes providing MLM news and advice. A UNA member earned commissions based on sales of others below him. The UNA's for-profit status incensed many MLMers. At the Multi-Level Marketing International Association's February board meeting in Newport Beach, Calif., president Doris Wood said: ''We don't need that kind of crap in our industry.'' UNA co-founder Sal Serio told Money his group was ''considered a threat'' by many MLM companies. (Later, Serio denied making that statement.) In April the UNA dropped its multilevel setup. Now membership costs $144 a year. Overeager distributors frequently give out erroneous information. A mailing ! from one distributor for Nuva, a vitamin MLM, says his program lets you have a ''fully vested retirement at any age.'' When informed of this promise, Nuva president Wilfred Schneider said, ''It better not say 'vested' retirement. There's no vesting at all.'' Another MLM that plays off retirement fears is Tradevest, a buying service based in Fort Lauderdale, Fla. Its founder, Jeffrey Cohen, is an Ayn Rand disciple who formerly sold life insurance and limited partnerships and helped run a time-share company. A Tradevest sales brochure calls the company the solution to the problem that ''nine out of 10 Americans reach age 65 with insufficient funds for retirement.'' With Tradevest, a customer buys brand-name merchandise ''at K Mart prices'' because, says Cohen, the company does not add on marketing costs. A portion of the customer's money goes into a 20-year deferred annuity with Bradford National Life. In 20 years, according to Tradevest, you could get back as much or more than what you paid for the products. (Originally, says Cohen, the money went into an irrevocable trust at a Florida office of Merrill Lynch or E.F. Hutton instead of an annuity.) A Tradevest customer pays $839 and an annual $39 service fee. But the fine print on Tradevest's sales contract shows that the customer qualifies for an annuity check in 20 years only if he earns enough ''annuity credits.'' Currently, that means buying at least $2,410 worth of products this year in addition to the $839 and the $39 annual fees. The purchase amount needed to qualify for the annuity will fluctuate annually. Tradevest has had several run-ins with regulators. In July, the Washington Department of Licensing issued a temporary cease and desist order against Tradevest because its trust arrangement was considered a sale of unregistered securities. In August, Tradevest signed an agreement with the Oregon Department of Justice never to do business in that state. The company also agreed to a settlement with California enforcement authorities, paying $60,000 in penalties and costs. Cohen dismisses Tradevest's legal problems: ''We are the cleanest network marketing company ever.'' He has big plans for Tradevest. Today, Cohen says, the company has sales of $7 million with 6,000 customers and 9,000 distributors. He projects sales in 1989 to hit $1.2 billion, with 250,000 customers and 325,000 distributors.
Jim Strickland is an MLM distributor shooting for the stars. Since 1982 he / has worked for six multilevel companies, including Cambridge Plan of Cambridge Diet fame. At another, Pre-Paid Legal Services, Strickland says his initial sales volume was high, but the size of his commissions from policy renewals was low. ''I saw that realistically I could earn $50,000 to $60,000 a year, part time, working 25 hours a week,'' says Strickland. But he thought he deserved more money for such an effort. He next tried Empires Unlimited, a coupon service, and then International Smart Shoppers Club, a discount-buying service. Strickland figures he lost $15,000 between the two companies within six months. He joined the Nuva vitamin MLM as a part-time distributor Jan. 1, 1987 and has since quit his full-time job as an owner of a chemical distribution company to work full time for Nuva. ''I'm making money like crazy and will be up to $25,000 a month within 90 days,'' he says. ''This company is the Amway of the future. I think I finally hit pay dirt.''
Big talk is commonplace in MLM. Some extraordinary claims recently have come from some long-distance telephone MLM companies known as resellers. These firms buy or lease phone lines from companies such as AT&T and then sell long- distance service for roughly $100 a month. Attorneys general in several states have shut down a few such MLMs, determining that callers could rarely complete their calls because of repeated busy signals. Officials at the Federal Communications Commission say they are aware of such problems. But, says Marcia Alterman, a top FCC complaints official,the agency will deal with customer problems ''on a case-by-case basis'' as complaints come in. Why not shut down companies that do not provide the service they promise? The FCC takes a laissez-faire attitude. Says Alterman: ''If the companies don't offer reasonable service, they won't stay in business very long.'' Many of the most popular MLM companies sell vitamins and nutritional products such as ersatz milk shakes. They frequently take advantage of the Food and Drug Administration's recent see-no-evil policy toward taking action against misleading claims made about such products. (In late April, the FDA took one step by telling three cosmetics companies -- none MLMs -- to stop making some claims for their anti-aging skin-care products or register them as drugs with the FDA.) Stephen Barrett, editor of the monthly newsletter Nutrition Forum and recipient of a 1984 award from the FDA for exposing nutritional quackery, ^ says: ''I've told the FDA of 300 illegally marketed products, many of them from multilevel companies, but the agency has taken no action on them.'' An FDA spokesman responds: ''A good number of nutritional products fall into the area of puffery claims, rather than representing a direct health threat. While these products may be in technical violation of the law, we won't spend our resources to challenge the claims.'' The multilevel marketing mess must be contained, if not halted. Five suggestions for cleaning up both the multilevel business and its image: -- The industry should police itself better. The Multi-Level Marketing International Association is too small to have an effect. The far larger Direct Selling Association monitors only its members -- mostly huge, reputable companies such as Amway and Shaklee. The two groups should work together, reporting illegal pyramid schemes and deceptive claims to state and federal enforcement authorities. -- Congress should pass a federal multilevel marketing law such as one proposed in 1973 by then-Senator Walter Mondale. The law would set standards and delineate the differences between a legal company and an illegal pyramid scheme. It also would prohibit an MLM owner found guilty in court of running an illegal pyramid from starting another multilevel company. -- The Federal Trade Commission should enforce the law already on the books and curb misleading and deceptive sales practices in multilevel marketing. -- The Food and Drug Administration should zealously enforce an existing law that lets the agency halt fraudulent claims made by nutrition companies. Says Stephen Barrett: ''The FDA's enforcement program is ineffective.'' -- The state legislatures should pass laws requiring MLMs to file disclosure statements with the state agencies where they are based. This way, a prospective customer or distributor could find out about the business experience of an MLM founder and his capitalization. In the meantime, multilevel marketing marches on. Mike MacMillan quit his job as a Houston senior systems analyst for Exxon in May 1986 to become a distributor for the discount-grocery multilevel company MLP/Trend (MLP stands for Multi Level Products and Making Life Profitable). MacMillan says he built a downline of 6,000 distributors and earned as much as $4,000 in one month. In July, MacMillan continued placing orders, but MLP/Trend's checks stopped coming. ''I lost my tail end,'' he says. MacMillan figures MLP/Trend owes him $6,000 to $8,000. MLP/Trend president G. David George says he is reorganizing the company and expects to make good on the checks, though he has said he prefers that distributors take their money in Trend groceries. MacMillan sums up the experience this way: ''I now trust people much less than I used to. That happens a lot after you've been in multilevel marketing.''