You Can't Cheat an Honest Man - James Walsh [93]
The attorney general’s office had used a decoy investigation to discover how the program worked. “We had this guy in there, and the things he saw were amazing,” says one investigator involved in the case. “These guys were draining hundreds of dollars out of the poorest people around. They promised new cars—for free or close to it. It was like a lottery. And they were lining up to hand over the two hundred bucks.”
The State charged Herbert and Warren with selling the right to participate in a pyramid sales scheme in violation of Missouri law. Under Missouri law, a pyramid sales scheme was defined as:
any plan for the sale or distribution of goods, services or other property wherein a person for a consideration acquires the opportunity to receive a pecuniary benefit, which is not primarily contingent on the volume or quantity of goods, services, or other property sold or distributed for purposes of resale to consumers, and is based upon the inducement of additional persons, by himself or others, regardless of number, to participate in the same plan[.]
In the spring of 1993, a Missouri court issued a summary judgment granting the attorney general’s requests—and effectively closed down the scheme. While it considered the details of the case, the court ordered C.A.R. and its principals to stop selling memberships in the program and from promoting it in any way.
In May 1993, the same court concluded that the C.A.R. program was a pyramid sales scheme. This made its preliminary ruling permanent. Cautionary Steps
From the Ponzi perp’s perspective, there are many things that are appealing about MLM. A couple are psychological.
People who get ripped off by MLM programs are often unwilling to go public. They aren’t likely to complain about a scheme full of their friends and relatives. Also, because of the entrepreneurial and patriotic rhetoric that marks recruiting meetings and MLM literature, people often assume that they’re to blame if they aren’t able to recruit enough people to make money.
To avoid these traps—and others—there are some basic steps anyone considering joining an MLM program should take before signing up:
• determine how much of a distributor’s income comes from sales rather than recruiting other distributors. One common standard is that 70 percent of a distributor’s income should come from selling product;
• ask how many levels of recruits a distributor has to bring in before making money. The geometric progression of recruitment tends to burn out by the third or fourth level;
• be cautious of large start-up fees. Sleazy MLMs charge as much as they can. Since many states require reporting for franchises that cost more than $500, a lot of MLM’s charge $499 to join;
• get a written guarantee that the company will buy back unsold product. Some state laws require a 90 percent buy-back;
• resist the temptation to invest just because you know the person selling the program. Most MLM programs rely on recruitment of friends and family. This gives people an unrealistic impression of the company’s size and market presence;
• ask how long it typically takes to get payment from the company. A legitimate MLM company should take no longer than 90 days to pay commissions and bonuses—and good ones will pay even sooner;
• find out what expenses you’ll have to pay. Sleazy MLM programs require that you attend sales conventions at your own expense in order to receive overrides and bonuses;
• don’t believe a promoter who says the venture has been approved by the state attorney general’s office or any other regulatory agency. These offices don’t approve of or endorse any business ventures.
In the end, the difference between legit and bogus schemes is simple: an illegal pyramid focuses on recruitment of new members to make money; a legitimate MLM program focuses on selling product.
The problem is that, in the heat of