Anti-MLM Figure Robert FitzPatrick Attacks The Industry

Robert L. FitzPatrick


Robert FitzPatrick co-founded and serves as president of Pyramid Scheme Alert and is a notorious Anti-MLM figure. A self proclaimed expert with little understanding of even the most basic, fundamental concepts of how this business actually works.

Yesterday he published his attack on the MLM industry as part of an article about Herbalife.

Robert FitzPatrick:

What No One Wants To Say About Herbalife:

What possibly could be said further about Herbalife ? It has been dissected in every conceivable way, statistically, analytically, and legally. Yes, except for the one issue that has the most profound and long-term meaning to the consuming public and the nation.

Before stating and describing that one meaningful aspect and in order to put it in context, let us acknowledge the one aspect of the Herbalife saga that is of the least significance to the consuming public and the nation. This would be whether or not Carl Icahn and George Soros ever win their big bet against William Ackman.

The fates of these parties have less meaning in the real-life Herbalife question than those of Breaking Bad's Walter White and his brother in law, Hank Schrader, had to our daily lives. The fates of Walter and Hank gripped the nation's imagination but, alas, were only fiction, mere entertainment. So too, Bill, Carl and George are Super-Hero figurines, as far as they relate to the true meaning of Herbalife for Main Street America and many other countries.

The true significance of the Herbalife controversy involves a dollar figure, each year, that dwarfs the piddling one-billion at stake in their wager. The true meaning of the Herbalife inquiry is a global matter affecting governments and tens of millions of ordinary people who never heard of Ackman, Icahn and Soros. We will not speak of them again in this essay except to reference the far larger question in which they do play a role.

Don't Mention the Industry

Instead, let us speak now of reality, beginning with a plain and obvious fact about Herbalife. It is that Herbalife is garden-variety multi-level marketing (MLM). Anyone who has taken time to study this field called multi-level marketing, whether they are promoters or whistle-blowers, will attest that Herbalife is prototypical of the MLM business model, pay plan, marketing strategy, distributor churn factors, and financial outcomes.

Herbalife is a long-time member of the Direct Selling Association (DSA), which promotes and defends its MLM members, one and all, in court, on Capitol Hill and in the media. Anyone who takes time to inquire will readily discern that Herbalife looks and operates exactly like hundreds of other multi-level marketing companies.

Those other companies would, in turn, verify and boast that they operate like Herbalife, which, until all the recent controversy, was upheld as the perfect paragon of the MLM business model.

In every respect, no significant differences can be detected between Herbalife and scores of other MLMs, large and small.

  • 90-99% loss rate among distributors? Same for hundreds of MLMs, according to their own income disclosures.
  • Majority of commissions, per sale, go to those at the top of the chain? Definitely. At Herbalife over 80% of all commissions wind up in the hands of the top 1% of the sales chain. This is mirrored in all MLMs with their hallmark pay formulas of special bonuses and escalating commission rates accruing to the top ranks and based on production volume of those below.
  • Lack of verified retail sales and claims that contract distributors can count as end-users? Yes. None of the MLMs tracks or accounts for conventional retail sales and none pays commissions for retail sales. Double-counting the distributors as both salespeople and customers is the official position of the DSA.
  • Rewards to recruiters paid on purchases made by new sales recruits? Of course. This is standard practice.
  • Unlimited recruiting? For sure. Indeed, the offer of unlimited income based on a limitless font of new recruits is the defining feature of the business model. No other business can match it.
  • Deceptive income claims? Overpriced, over-hyped product? Targeting uninformed and financially strapped minorities to invest in the pay plan? Check. Check. Check. The FTC, the SEC, the BBB, and Postal Service all post consumer warnings about such deceptions in the MLM world.

Yet, the rules of engagement and the media narrative in the current Herbalife war require an absurd pretense that Herbalife is somehow unique in its own field of multi-level marketing. The public is asked to single out Herbalife as fundamentally different from all its MLM peers, as a swindler, not a sales business. Don't mention the MLM industry as a whole!

So, if Herbalife is a fraud, as Bill Ackman and many other people on Wall Street are loudly charging, echoing previous class action suits, a European court ruling, and the assessment of other consumer groups, then logic and reality dictate that this charge must be leveled also at Herbalife's peers. No leap of faith is required, but only a relinquishing of the false narrative about the outlaw Herbalife. Just ask the DSA if Herbalife is different.

Could 15 Million Americans Be Wronged?

Which brings us to the issue that really does have profound and long-term meaning to the consuming public and the nation and to all Herbalife shareholders. Each year, millions of people in the USA, 15 million according to the DSA, are investing in the MLM business proposition, essentially the same one that Herbalife offers. They are brought to ecstatic jubilation by MLM promoters in huge auditoriums. They are sent forth to recruit their closest friends and relatives into the business proposition they have invested in – the same one that Herbalife offers. They are told it is their financial salvation, a safe haven from Recession, their pathway out of barrios, dead-end jobs, unemployment and the terrors of foreclosure.

Exactly this same message is delivered and this same spectacle is produced at each and every MLM. Close your eyes and you could be at an HOM (Herbalife Opportunity Meeting), or an extravaganza of a hundred other MLMs. The viability of the MLM income opportunity is now a fervent belief and a desperate hope for millions and millions of people, even though it is well documented that just 1% ever make a sustainable profit. In all these MLM companies, those 99% that never achieve their dreams and whose investments in fees, time and purchases get transferred to the winners are made to understand that their failure is their own fault.

Could these millions of Americans be getting fleeced? Are they hopelessly chasing a calculated lie? Are we talking about a $30 billion pseudo-industry, made in the USA, with Herbalife being only an $800 million slice? If this is possible, then the fraud is pandemic, reaching more than 65 other counties, and most of the scams are waving an American flag signifying an American export.

Recently, an international coalition of consumer activists, internet bloggers, entrepreneurs and professionals filed a Petition requesting that the Federal Trade Commission (FTC) investigate, not just Herbalife, but the entire multi-level marketing industry for fraudulent and deceptive practices. The filing was reported by Reuters, NY Post, Financial Times, Los Angeles Times and others. The coalition includes members from India, China, Ukraine, Finland, Canada, Britain and Austria. The petition was filed by attorney Douglas M. Brooks, himself a member of the coalition, who has successfully litigated a number of class actions against MLM firms, including Herbalife and Nu Skin (NUS). I signed on as president of the 12-year old consumer group, Pyramid Scheme Alert. None of the signers are players in Herbalife's stock battles or were compensated for participating in the campaign.

The formal petition was accompanied by a spread sheet of over 1,000 consumers who signed an online request for an FTC investigation of the entire MLM industry. Many of those online signers offered tragic accounts of their encounters with MLM. They referenced over 50 different MLM firms.

Endless Chain

The Coalition's petition went to the core issue – the MLM value proposition – which the Coalition describes as a false income offer based on the classic chain-letter trick. The petition states, Any MLM program which permits unlimited recruiting and rewards distributors with commissions paid on the purchases of other distributors should be deemed to be a pyramid scheme without the need for further analysis.

The Petition points out what many Wall Street analysts are working hard not to acknowledge while also trying to conduct a serious inquiry into Herbalife. It is that the MLM business proposition is based upon the endless chain. Each investor makes money from new investors who do the same, ad infinitum, and if the recruiting of new investors stops, the entire operation falls down. All the rest – the levels of retail sales, the price of the products, the shipping costs, etc. – are details. The endless chain is a fraud, per se. It cannot deliver what it promises.

But, wait, multi-level marketing is direct selling you say? Yes, it is called direct selling. In the 1960s, pioneers of what is now called multi-level marketing, took the treasured American identity of the resolute and always optimistic Yankee Peddler and created a new, made-in-America business model. Here's how it works:

  • In the obsolete direct selling model, salespeople were recruited to sell products to end-user customers. In the reinvented direct selling model, the salespeople themselves are the end-user customers.
  • In the old model, the chance to sell the products was the profit opportunity. In the new model, the profit opportunity is the chance to sell the profit opportunity.
  • In the old model the salespeople sold products to get paid. In the new model, salespeople buy products to get paid.
  • In the traditional model, most commissions, per sale, went to the salespeople who made the sale. In the new model, most commissions, per sale, go to the salespeople who recruit the salespeople who make a purchase.

A sales model in which salespeople buy products, but don't actually sell them, and instead are offered rewards if they recruit other salespeople to do the same, with each level of the chain promoting the opportunity to extend the chain – forever – and most of the total rewards are routed to the top of the sales channel? Can anyone reading this article call this a legitimate business?

Heart of Darkness

But now we have come to heart of darkness about this Herbalife controversy. It is not just that Latinos and other low income people are being duped. That is an ugly symptom. The terrible possibility, which the Ackman-Icahn-Soros duel raises but assiduously avoids acknowledging, is that of an endless chain epidemic, far larger than Herbalife, rolling across the country, spreading worldwide, masquerading as direct selling. The scenario that no one wants to speak about is a vast financial manipulation analogous to our recent housing catastrophe in which, not the dream of home ownership, but home-based businesses are being exploited to build a huge financial pyramid – toxic securities sold to Main Street.

Quoting the Petition filed with the FTC by the new Consumer Coalition, The MLM industry has taken advantage of the confusion over what constitutes a pyramid scheme, and the lack of any pre-sale disclosure requirement, to become a multi-billion dollar behemoth in which the vast majority of participants lose their investments and eventually drop out, while a tiny percentage of distributors at the top of the chain become very wealthy.

This reality would mean not one, but hundreds of companies operating on the basis of deception that renders a free and fair contract impossible. It would point to many companies' profits depending upon a utopian message of unlimited wealth that is shamelessly, cruelly untrue. This is a reality few want to examine for its veracity.

Denial and avoidance of this possible reality might have been a feasible defense against the uncomfortable facts raised by Ackman and others, but then there was this year's unsettling FTC prosecution of the large MLM, Fortune High Tech Marketing. FHTM basked in legitimacy as it swept across America for more than 10 years, pulling in over 500,000 households, and $30 million a month, only later to be shut down by the FTC as a pyramid fraud. That prosecution raises the harrowing question of how many other FHTM-type swindles are out there, appearing and being treated by regulators and the business media as legal?

Adding to the weight of that question was the California Attorney General's prosecution of the MLM, Your Travel (YTB), a member of the Direct Selling Association, with over 200,000 salespeople. No action had ever been taken against YTB by the FTC or any other state Attorney General. YTB had become one of the country's largest travel agencies. It was in a marketing partnership with the Kansas City Chiefs football team. As a publicly traded stock, the SEC had not found cause for any investigation of YTB. More than 280,000 shares of its stock were traded every day and it was selling (prior to the prosecution) for over 100 times earnings. When the full force of the prosecution took effect, the stock went to zero.

Dare Not Said

If Herbalife is really a fraud – not a business – it would mean that a fraudulent business model used by many companies is being embraced by thousands of Wall Street shareholders, endorsed by celebrities and sports stars and supported by many politicians who accept MLM campaign contributions, just as it played out with YTB.

If Herbalife is a fraud, and is also an icon of multi-level marketing, then does it not raise the question that owners and executives of other MLM frauds serve on Chamber of Commerce boards and with financial contributions are influencing Congress and by extension, the FTC? Are other MLM frauds being aided by the US Dept. of Commerce to expand to other countries, given tax subsidies to open headquarters or distribution centers by state legislatures and listed on major stock exchanges? These are the unavoidable and valid questions inherent in the Herbalife controversy even if the main participants dare not say them.

It has now become recognized that Bernard Madoff's Ponzi was not really such a secret on Wall Street. Some earlier investors smelled a rat but did not want to stop receiving their predictable 12% annual returns. Others knew it had to be a fraud, but remained silent out of loyalty or fear. And the SEC, when presented with careful research and indisputable math from a dedicated whistle-blower, apparently let Madoff's philanthropy, celebrity, and financial star power intimidate them into inaction.

And, as we now know all too well, when the housing/mortgage/banking bubble expanded beyond all possibility of sustainability, many business leaders and investors chose to play along rather than dare to tell the terrible truth. Who wants to be accused of bringing down the whole house of cards?

In the case of Herbalife, even Bill Ackman is apparently trying to slip only one key card out from the flimsy and contrived structure called multi-level marketing, but it is unavoidable that as Herbalife goes, so too the entire MLM industry.

Source: Seekingalpha

Get more information, facts and figures about Herbalife, click here for the Herbalife overview.

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