Submission Number: 00026
Received: 1/18/2011 4:10:51 PM
Commenter: Robert FitzPatrick
Organization: Pyramid Scheme Alert
State: North Carolina
Agency: Federal Trade Commission
Initiative: Trade Regulation Rule on Disclosure Requirements and Prohibitions Concerning Business Opportunities - FTC File No. R511993
Attachments: No Attachments
As president of a non-profit group that has communicated with thousands of consumers who suffered losses in multi-level marketing (MLM) companies, I object to the FTC staff report to exclude multi-level marketing from the proposed rule on business opportunity solicitations. The exclusion defies evidence and the experience of millions of people.
The basis of the exclusion appears to be the extraordinary claim that there is insufficient evidence of widespread fraud in the multi-level marketing field. (Page 30: "First, the IPBOR would have unintentionally swept in numerous commercial arrangements where there is little or no evidence that fraud is occurring." It may also be based on Footnote 60, page 21, "None of the comments received provided an industry-wide analysis of pyramid schemes masquerading as MLMs."
Though the Proposed Rule is to protect consumers with requirements for disclosure, the staff appears to limit the meaning of fraud only to proven pyramid schemes. This is a meaningless and useless distinction since proof requires prosecutions and lacks even a federal law that defines a pyramid scheme.
This staff statement of "no evidence" of fraud flies in the face of available data on the scale of losses suffered by consumers who are solicited to invest in MLM income opportunity propositions. In my previously submitted report, "The Myth of Income Opportunity in Multi-Level Marketing", I provided data on 11 representative MLM companies showing that virtually no consumers are able to earn a net profit from investing in MLM business opportunity offerings. The collective losses are in the billions annually.
Additionally, the claim ignores the glaring fact that the largest of all MLM companies, Amway, the industry leader, just settled fraud charges brought against it by consumers in a federal class action lawsuit. Amway agreed to spend $150 million in restitution to victims, who count in the tens of thousands. When the industry leader settles fraud charges with $150 million in payments, a red flag has been waved in the face of the FTC staff that similar practices exist in the industry.
The FTC staff's claim of lack of evidence ignores the recent prosecution of the MLM member of the Direct Selling Association (DSA), Your Travel Biz.com, by the California Attorney General for violating its "endless chain" law. The MLM company had grown to the 26th largest travel agency in America and drew tens of thousands of consumers to its annual meeting to hear its "business opportunity" solicitation. If a company of this size and a member of the industry trade association is prosecuted because its business model is flawed, this is indicative of wider problems in that industry where the model is prevalent.
The staff claims of no evidence ignore the recent class action lawsuits against other large MLMs and the recent prosecution of two large MLMs by the state of Montana. It ignores the hundreds of thousands of web pages in which consumers question or assail the legitimacy of MLM, based on their own experience or that of friends and family. If the FTC requires "proof" in the face of this evidence, it reveals reluctance or refusal to investigate, which is its duty.
It is impossible to read the FTC staff opinion without being reminded of Harry Markopolos' book, "No One Would Listen," in which he described the SEC's tragic failure to recognize or act upon the deception employed by Bernard Madoff, despite his whistle-blower warnings and the obvious and easily obtained evidence he presented to the agency.
Finally, I refer to and support the research you have received and been alerted to by Dr. Jon Taylor, in particular his comments filed when the original Rule was announced, numbered #522418-08379 and #522418-70047, dated July 14, 2006. His work is entitled, "Report of Violations of the FTC Order for Nu Skin to cease its misrepresentations of distributor earnings."