You Can't Cheat an Honest Man - James Walsh [92]
The Blurred Boundry Between Legal and Illegal
MLM is legal. But some MLM companies press the limits of the law— and become, essentially, illegal pyramid schemes. MLM programs are regularly accused by prosecutors of shady practices, including violating anti-pyramid laws and making false claims about “miracle” products.
Other problems: misrepresentation of potential income and “inventory loading,” the practice of encouraging distributors to buy a basement full of products in order to reap a higher sales commission.
Much of that merchandise never gets sold. This practice is illegal and in many states, and attorney generals are eagerly investigating complaints. “Every illegal pyramid is an MLM company,” said Robert Ward, a Michigan assistant attorney general. “But not every MLM is an illegal pyramid.”
Ward says that, in his state, the average multi-level marketer remains in business just 18 to 24 months. This observation is generally true. The turnover rate in MLM sales is high; in most programs, as many people drop out as join up in a given year. Which means, eventually, the MLM is going to run out of distributors.
Jeffrey Babener, an Oregon lawyer who specializes in MLM cases, says that an ordinary person can reasonably expect to make $300 to $1,000 per month from a legitimate program. If he or she works hard at it. He also says that, because MLM relies so heavily on social interaction, the programs work better in some regions than in others: “MLM does not do that well in the Northeast. It does best where people are friendly and are out and about—the Sunbelt, Bible Belt and California.”
Still, MLM’s ability to defy conventional marketing notions and generate eye-popping revenue attracts unscrupulous marketers and Ponzi perps. It will always be a source of concern for regulatory bodies at state and federal levels whose job it is to protect the unwary buyer from tall stories promising outrageous riches.
One MLM Program Crashes into the Law
Missouri-based Consumer Automotive Resources, Inc. (C.A.R.) was a clear case of an illegal pyramid scheme that tried to pass itself off as a legitimate MLM program. William Herbert and Robert Warren promoted the scam as a program for helping people buy cars inexpensively. In exchange for a steady flow of customers ready to buy, participating car dealers would offer deep discounts and good financing packages. Then, the dealers would pay a 5 percent commission to C.A.R. on the car sales resulting from references it made.
In the early 1990s, C.A.R. was looking for distributors who would— theoretically—earn commissions for locating the people who wanted to buy cars.
Like the worst MLM programs and most Ponzi schemes, C.A.R. was full of jargon and complex commission guidelines. To participate in the program, a distributor (called a “member”) created a personal income center (PIC) by completing an application form and paying a $190.00 enrollment fee. The PIC was “activated” when the member recruited at least one other person in the program. The member earned maximum commissions when he or she recruited two people.
The initial member received a one-time commission of $70 for each person he or she recruited and a “network management commission” of $6 a month for each person enrolled in his or her downline group. C.A.R. executives claimed lamely that these commissions were advances against the 5 percent fees for car sales—rather than for recruiting dupes. (The monthly commissions paid to the members, however, depended only on the number of people enrolled in a downline pay group.)
As unlikely as it seems, the pitch worked. In December 1992, C.A.R.’s membership included approximately 1,400 distributors from 20 states.
C.A.R. offered members various tools for recruiting people. It scripted public informational meetings, provided a video and brochures, and gave distributors pointers for recruiting. However, in more than two years of operation, C.A.R. only sold two cars.
In December 1992, the scheme started running into trouble. The Missouri attorney