News from Pyramid Scheme Alert:

Mannatech, a long time MLM company, member of the Direct Selling Association and publicly traded on the New York Stock Exchange, has agreed to pay millions of dollars to consumers who were deceived by its false health claims about its products. The state of Texas, where the scheme is based, charged that Mannatech falsely claimed that its food supplements cured Down syndrome, cystic fibrosis, cancer and other serious diseases.

The unholy combination of a snake-oil product with a pyramid income scheme is a defining characteristic of multi-level marketing. The schemes often claim “patented” products made from “secret formulas” that work at the “cellular level” and always, “not a available in stores.” These claims are made for vitamins, herbs, and minerals. In virtually all cases the products are essentially same as products readily available in health food stores or even grocery stores for a fraction of the price.

In some cases, the products are lethal, as when MLMs were the largest promoters of weight loss herbs containing ephedrine, now banned by the FDA for causing strokes. The latest craze of miracle health claims is fruit juice, selling for $40 a bottle! The organizer of the largest scheme of that type, Monavie, had previously been stopped by the FDA for making the very same types of lies that Mannatech was fined for. That scheme, like Mannatech’s, is based on endless chain recruiting, and causes massive consumer losses.

Consumers are frequently lured into MLM not just by the amazing health claims but by the promises that the products can produce extraordinary income. This income potential often gives the products nearly magical powers, at least for awhile. Many consumers will swear the products produced cures, better energy, greater intelligence and focus or improved sex, as long as they belive they will soon make a lot of money. Predictably, as the income promises prove unrewarding, the curative health benefits tend to wane. Soon, most consumers quit the scheme and stop buying the products forever.

Beyond illustrating, yet again, that many MLMs are in the snake-oil business, there is one more aspect to the Mannatech case that applies to the larger MLM industry. The Attorney General of Texas charged this company only with making false product claims, but it did not prosecute it for operating a pyramid scheme. Manatech is a classic endless chain recruitment scheme. It has minimal retail sales, and only pays a 9% commission for retailing while paying 45% out in recruitment-based commission, with most of that money going only to the those at the very top of the recruitment pyramid. So, why was Mannatech not prosecuted for pyramid fraud?

One probable reason is that under Texas law, an MLM can legally operate an endless chain pay scheme, with virtually no retail customers, a classic “closed” market in which product depends entirely on endless chain recruiting. How could this be?

The lobby group for he MLM industry, the Direct Selling Association (DSA), wrote the “anti-pyramid” law in Texas. As in several other states, the DSA has pushed though bills that revise anti-fraud law so as to make “product-based” pyramids legal. The trick in the wording is to exempt schemes in which pyramid payments are based on “product purchases.” With that wording change, pyramid rewards can be paid  on the purchase derived solely from those within the pyramid and in which endless chain recruiting is the only way to make a profit. Even though such a plan is closed, non-competitive and  dooms 90-99% to losses, (since they will be in bottom ranks), the law makes it legal for promoters to claim they are a legitimate “income opportunity” for all.

Some pyramids have tried to disguise the money transfer as “gifts.” MLM’s favored disguise is “product purchases.” Most MLM products are absurdly overpriced and 40-50% of the exorbitant price is transferred to the pyramid recruiters as “commissions.”  In this way, the pyramid money is laundered through “products.” The Texas law, written by the DSA, exempts schemes, such as Mannatech, that do this.

This same “wolf in sheep’s clothing” law that pretends to be “anti-pyramid” while in fact protecting the scams, was also introduced as a proposed federal law. Pyramid Scheme Alert opposed the bill and alterted Congressional representatives of its devious and harmful intent. It never got out of committee in Congress, but it did gain some Congressional supporters, many of whom were strongly supported by the Amway corporation, such as Congresswoman Sue Myrick of North Carolina. The sponsor of this pro-pyramid bill in Congress was Joe Barton of Texas.