here's hardly a person alive who hasn't been pitched the opportunity to get in on a "great way" to make tons of money. Solicitations come face to face, on TV, in magazines and newspapers, and more recently, over the Internet—so many people interested in letting you share the secrets of financial success. Unfortunately, when it comes to multilevel marketing (MLM) plans and pyramid schemes, many consumers go in with their eyes wide shut and their wallets wide open.

     For more information

If you become a
success, it's driven by
the cycling in
and cycling out
of losers.

MLMs thrive just as
the gambling industry
winners talk
and losers don't.
An exciting opportunity
Many people find it impossible to resist becoming part of a "completely legal," "can't lose" moneymaking opportunity. One such e-mail solicitation promises that you don't have to work, have contact with people, or even leave the house to make $50,000 in 90 days. Then comes the story of how the author was downsized from his job and now makes scads of money. The letter goes on to say: "As with all multilevel marketing businesses, we build our business by recruiting new partners and selling our products." However, in this case, there is no real product, just "reports" telling you how to make money from others by selling these reports.

A Federal Trade Commission (FTC) Consumer Alert defines MLM plans as a way to sell goods or services through distributors. These plans, collectively described by insiders as "potions, lotions, and pills," also include such things as phone cards, laundry disks, and home-care products. According to the FTC, the usual promise is that "if you sign up to be a distributor, you will receive commissions—not only on your sales of the plan's goods and services, but also on the sales of the people you recruit to join the distributors. Pyramids have a similar structure, but a completely different focus. They concentrate on the commissions you could earn just for recruiting new distributors, and generally ignore the marketing and selling of products or services."

According to the North Carolina attorney general's office, pyramid schemes currently rank in the top five categories of consumer fraud. One recent scam involved International Heritage Inc. (IHI), whose MLM-turned-pyramid tactics resulted in more than 2,000 complaints filed with the attorney general's office. "Somewhere around 180,000 people participating in IHI lost money," says Christine Lanning, North Carolina's assistant attorney general. Those who filed complaints with the North Carolina office lost, on average, about $1,000. This doesn't include additional money IHI recruits spent on training, trips, and rallies.

IHI, according to Lanning, sold "business centers," each of which represented a point on the pyramid costing $250. The more people someone recruited to buy business centers, the greater the opportunity to earn commissions. Soon the weight of the pyramid collapsed on itself, leaving sales commissions unpaid and dreams dashed. After several state and federal agencies got involved, IHI filed for bankruptcy, leaving thousands of people in its disappointing wake.

The odds are against you
No matter how enticing the promises, there's a mathematical limit to how many people can recruit others and end up making money. According to the North Carolina attorney general's office, if a program begins with one person, who recruits two, each of whom recruits two more, and so on, in 28 levels more than the entire U.S. population would be involved.

Illegal pyramid schemes

Level Number of new
Total number of

1 1 1

4 8 15

8 128 255

12 2,048 4,095

16 32,768 65,535

20 524,288 1,048,575

24 8,388,608 16,777,215

28 134,217,728 268,435,455

Robert FitzPatrick, author of "False Profits" (ISBN 0964879514), a book that examines the MLM industry and related pyramid schemes, says it's nearly impossible to make the kind of money MLM solicitations promise. He offers a look at Amway, the largest MLM company, which is required by court order to provide income information. Over the past 20 years, says FitzPatrick, more than five million people have signed up with Amway, most of whom quit within a year. Less than 1% ever reach the minimum distributorship level and only 800 ever have reached the coveted Diamond Level. "The average gross income per year of all current Amway distributors is under $50 a month, and this doesn't include costs. This model can be overlaid on the whole industry. [The number of] people who earn a living is absurdly small."

And if you do make money, where does it come from? The answer brings up FitzPatrick's second point: "Can you feel good in a business in which you'll be recruiting losers from whom you'll earn your keep?" Any income distributors make comes from the investments of people down the chain. "Again," says FitzPatrick, "statistically most goods are purchased by those in the program." He says Amway's information shows that distributors purchase 82% of its goods; consumers purchase only 18%.

"Distributors buy the product as part of getting into the plan, some of which they'll consume, some of which they'll sell to recruits," says FitzPatrick. "You're buying goods because the business has promised you a misleadingly high profit. If you stay in the business and become a success, it's driven by the cycling in and cycling out of losers, which is different from selling a product." He says MLMs thrive just as the gambling industry thrives—because winners talk and losers don't.
     Don't pay or
     sign any contracts in
     an "opportunity
     meeting" or any
     other high-pressure

Many consumers
go in with their
eyes wide shut
and their wallets
wide open.
Spend more to make more
Once investors realize they're not making money, they're thrown another piece of bait. Investors are told that they need to attend conferences, rallies, training programs, and buy books and tapes—all what they call "success tools," says FitzPatrick. "People who have lost a few hundred on products can lose thousands on training." All to convince themselves they really do have the character, vision, or attitude they're told they need to win.

Besides spending money, people also are cashing in on their personal relationships. Investors pitch the plan to friends, family, and co-workers, says FitzPatrick. They sell the same dreams they bought, and tell them they can do it too, when Fitzpatrick cautions that statistically few do.

1. Avoid any plan that includes commissions for recruiting additional distributors.

2. Beware of plans that ask new distributors to purchase expensive inventory.

3. Be cautious of plans that claim you will make money through continued growth of your "downline"—the commissions on sales made by new distributors—rather than through sales of products you make yourself.

4. Beware of plans that claim to sell miracle products or promise enormous earnings. Ask the promoter of the plan to substantiate claims with hard evidence.

5. Beware of shills—"decoy" references paid by a plan's promoter to describe their fictional success in earning money through the plan.

6. Don't pay or sign any contracts in an "opportunity meeting" or any other high-pressure situation. Insist on taking your time to think over a decision to join. Talk it over with your spouse, a knowledgeable friend, an accountant, or lawyer.

7. Check with your local Better Business Bureau, your state attorney general's office, or your consumer protection office about any plan you're considering—especially when the claims about the product or your potential earnings seem too good to be true.

For more information...
...visit these Web sites:

Or, contact your local Better Business Bureau, state attorney general's office, or consumer protection office.

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