Submitted by Cynthia Mittelsteadt, March 1, 2010
A day doesn’t go by that another MLM or network marketing company fails or is exposed as a scam or “pyramid scheme.” Every time this happens, consumers and small home business owners get hurt and lose millions of dollars a month. Legitimate direct marketing companies and consumers have been looking to the US Federal and State Governments to strengthen the laws to protect people looking for a home-based businesses and consumers purchasing products and services from MLM companies for years without success.
After researching the US Federal Government archives, I did not find any recent laws or rules regarding direct or networking marketing protection. Large network marketing companies like Amway, Mary Kay, Pre-paid Legal, Usana and many others continue to avoid prosecution by hiding behind the Federal Trade Commission (FTC) “Amway Safeguards Rule.”
In 1975, the FTC pursued Amway for deceptive business practices. After years of litigation, the FTC ruled that Amway was not an illegal pyramid scheme. In its decision, the FTC identified a “pyramid scheme” as the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users. The FTC also created the “Amway Safeguards Rule.”
Amway was not a pyramid scheme because of three consumer protection safeguards in its company policies: (1) it bought back goods of terminating distributors, (2) it required distributors to have sales to at least ten customers per month, and (3) it required distributors to sell seventy percent of the products they purchased each month to non-distributors.
The Amway decision has made it significantly more difficult for the FTC to prosecute companies under the FTC Act. MLMs, with the advice of legal counsel, now routinely implement the Amway Safeguards to ensure they will not be prosecuted as illegal pyramid schemes. In reality, these “safeguards” merely create mechanical steps that companies can follow to avoid prosecution. Thus, as long as a company utilizes the three Amway Safeguards identified by the FTC, it will not be prosecuted, even though the earnings of participants may be derived primarily from the payments of new recruits.
Assuming most companies have the Amway Safeguards in place, the only way to prosecute a pyramid marketing scheme under the FTC Act is to prove that a company has misrepresented its earnings potential. This is difficult to do because these companies typically tout the success of a few people at the top of the pyramid and then include a generic disclaimer, such as: “Success as a XYZ Company Representative is not guaranteed, but rather influenced by an individual’s specific efforts. Not all CAN Independent Representatives make a profit and no one can be guaranteed success as a XYZ Company Independent Representative.” Source: McGeorge Law Review, Vol. 39, No. 83, 2008
On May 23, 1998, presented a prepared statement Debra A. Valentine, General Counsel for the U.S. FTC addressed the FTC’s concern about the growing international problem of pyramid schemes. In her statement she observed, “What is striking about these schemes is that while they are very old forms of fraud, modern technology has vastly multiplied their potential for harming our citizens. The Internet in particular offers pyramid builders a multi-lane highway to worldwide recruits in virtually no time.” Source: “FTC 1998 Pyramid Scheme Statement.”
On April 12, 2006, the FTC published a Notice of a Proposed Business Opportunity Rule. On July 1, 2007, the FTC modified the Proposed Rule. As of the date, the Proposed Rule had not yet been enacted.
In recognition of the fact that many sellers of “business opportunities” can easily avoid the disclosure requirements of the Franchise Rule, either by offering to repurchase products from the victim or by keeping the initial investment below $500, the Proposed Rule aims to cast a wide net. It requires that, in connection with the sale of any “business opportunity,” the offeror of the opportunity make specific disclosures at least seven days before the prospective purchaser signs a contract or pays any money, whichever occurs first. Recognizing the burden of disclosure requirements under the Franchise Rule, the Proposed Rule requires the disclosure of significantly less information. Specifically, the Proposed Rule would eliminate the $500 minimum investment requirement from the Franchise Rule, meaning it would apply to all business opportunities, even if they have a smaller start-up cost.
The Proposed Rule also would eliminate many of the [twenty] disclosures that are required for franchises (trademarks, for example), but do not apply to business opportunities. Instead, the [Proposed Rule would require a one-page disclosure addressing five items: (1) whether or not sellers make earnings claims; (2) a list of any criminal or civil legal actions against the seller or its representatives that involve fraud, misrepresentations, securities, or deceptive or unfair trade practices; (3) whether the seller has cancellation or refund policies and such policies’ terms; (4) the total number of purchasers in the past two years and the number of those purchasers seeking a refund or to cancel in that time period; (5) and a list of references. Source: McGeorge Law Review, Vol. 39, No. 83, 2008
On March 12, 2003 the US House of Representative H.R. 1220 was proposed to the US House of Representatives to prohibit pyramid promotional schemes, chain letters, and related schemes. The Bill applies to enterprises that finance returns to participants through sums taken from newly attracted participants; in which new participants are promised large returns for their investments; and involve unfair and deceptive sales tactics, and lead to the victimization of unwitting individuals.
The Bill covers pyramid promotional schemes, chain letters and relates to schemes constituting a threat in interstate commerce and to the financial well-being of the citizens of the United States. With the advent of the global Internet makes pyramid promotional schemes international threats.
Do Something – Petition for Consumer Protection Against Pyramid Schemes
The US Federal and State Government have done very little to protect consumers and business opportunity seekers against “Pyramid Schemes” and “Internet Scams.” In recent years, Federal and State Lawmakers, the Federal Trade Commission (FTC) and the Securities & Exchange Commission (SEC) have ignored, allowed or protected pyramid and Ponzi operators to flourish without consumer safeguards. This has not only cost consumer billions of dollars but the Federal and State Government in lost tax revenue. Case in point, the Bernard Madoff scandal is part of a larger pattern of neglect and failure to enforce laws and protect consumers from Ponzi and pyramid scams. The $50 billion lost by investors is only the tip of the iceberg that cases like this cost consumers, investors and the Government.
How many more of these schemes and scams have to occur before the US Government acts on consumer protection fraud laws? I am asking you to do your part, if you want this to change. Please, Sign the Petition Below. Fraud and deception flourish when honest people are silent.
We, the People, call on Congress and the Obama Administration to end the neglect of consumer protection and the failure of law enforcement regarding pyramid scams and Ponzi operators.
We respectfully request a Congressional Investigation of the FTC and SEC regarding enforcement of laws against Pyramid Selling Schemes, Multi-level Marketing Scams, Ponzi Investment Frauds, Bogus "Business Opportunity" and "Work from Home" Schemes.
Sign Petition Here: (http://www.pyramidschemealert.org/ConsumerPetition.php )
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