Quatloos! > Investment
Fraud > Multi-Level
Marketing > Introduction
You see the ads all the time: "Make millions now,
no manager" or "Work on your own, start $12,000 per week." Maybe
you saw the ad in the paper, or maybe you received it by e-mail.
Yes, we're talking about Multi-Level Marketing, also
known as "MLM"
MLM: Once Legitimate, Now a Scam
Once upon a time, multi-level marketing was a legitimate
business which provided a way for small companies to get their
unique products to consumers in small towns and rural areas which
had no access to these products. At this time, the products sold
themselves, and the multi-level aspect was a way of giving a small
reward to those who had worked hard to build the organization.
But the focus was always on the product.
Today, and especially with the growth of the internet,
it is possible for consumer to get about whatever they want at
competitive prices. There is simply no real need for distribution
"systems" as there once was, and indeed the focus of all the programs
is not on the products they sell -- which are usually either bogus
or are available somewhere else to the public at the same or lesser
prices. Instead, the focus now is solely on recruiting new people
to either buy into the program or else to buy products that are
grossly overpriced (i.e., a $1 bottle of "herbal shampoo" for
$26), with the idea that those people will recruit additional
people who will also buy into the program or themselves buy the
grossly overpriced products.
Thus, today just about ALL of the multi-level marketing
programs are scams. In today's internet economy, there is simply
no need for multi-level marketing or the overpriced products that
they sell -- meaning that the only thing they are selling are
memberships in anticipation that future memberships will be sold
in the future, which is the classic definition of a pyramid scheme,
and thus securities fraud.
Because products are available over the internet
to everybody at lower costs than ever before, claims that "Multi-Level
Marketing will take over the World!" are completely bogus. Indeed,
the fact that no MLM schemes sell significant product to anybody
other than the people who bought into the programs is proof positive
that MLM is a dinosaur in today's economy, and exists only by
defrauding people to buy memberships in anticipation of being
able to make a profit defrauding other people into the program.
Indeed, as is discussed elsewhere, many of these
programs have been broken up for securities fraud and the people
in them now have criminal records. So, save your Quatloos and
avoid MLM schemes.
Like many advertising campaigns, many MLM programs
now attempt to associate themselves with celebrities. "Zig Ziglar
goes MLM!" read one spam e-mail we received.
Note that the celebrities didn't make their money
in MLM. Nor will you.
Buying Into the Program
So you are being "hired" to sell products, and you
have to buy into the program? This is a sure sign that it is a
scam. If the product is worth a darn, the company will make its
money selling the product. No program that requires you to buy
into the program is real, meaning that all our scams.
If you have to buy into the program, forget it!
It is not a real program.
Often MLM scams have sub-scams within the main scam
of buying Distributorships. One of these scams is the purchasing
of advertising materials. Think about it: A company wants you
to sell their product but they want you to pay for the advertising
materials? Especially with the huge profit margins that the Top
Guy makes with these programs, they should at least pay for your
brochures and tapes. If a company requires you to pay for advertising
or marketing materials, it is a sure sign that it is a scam. The
very worst programs will even require you to buy the "samples"
of the product that you have paid to be able to sell!
A scam-within-the-scam is the "training seminars"
offered (sometimes required) by the MLM programs. These "training
seminars" offer little training, but are mostly rah-rah seminars
to boost enthusiasm -- and to make big bucks for the promoters.
We have often seen people encouraged to take out thousands of
dollars in credit card debt to go to these seminars, with the
promise that they will make so much selling the MLM program that
they will quickly pay back the credit card debt (this is almost
These training seminars can cost thousands
although the company ought to be paying you to attend and learn
how to sell its product. No company which requires you to pay
for your own training seminar is a real program.
Only The Top People Make Money
The hard truth is that only the guy who sets up
the program, i.e., the Big Cheese at the very top, makes any really
good money with these programs. Everybody who is selling for the
Promoter typically gets screwed.
Nonetheless, the promoters of these programs will
often have pictures of themselves standing next to their mansion,
yacht, executive jet, whatever, to show their success. Yes, these
are real and they did make money by selling programs. Unfortunately,
they made this money by cheating and defrauding the people under
them to sell these programs for them -- you never see a distributor
with anything other than a bunch of credit card debt.
The Drop Out Rate
The "Drop Out Rate" of MLM programs is enormous
-- 98% will drop out immediately, meaning that only 2% will continue
with the program over any long period of time. The Promoters will
tell this 2% that they are the "successful" ones -- what this
means is that they have become "successful" scamming other people
(who will probably spend their money and then drop out, possibly
a big personal loss to them but a profit to the Promoters).
The Promoters know the Drop Out Rate, and know that
by far most people will buy in, but then never sell anything and
quit, which is one of the reasons why MLM programs are criminal
The Promoters also tell those who stay in that they
are the "well-motivated and lucky ones". This is 100% false. The
people who never sold anything and dropped out are the lucky ones,
since they will not be liable for securities fraud or any of the
related criminal penalties that goes with promoting somebody else
into the program. It is the people who stay in the program who
are risking some prison time and a felony conviction for selling
an unregistered security.
One of the biggest problems of MLM is that they
are marketed to people who are down-and-out and desperate, and
who can ill-afford to lose their money by purchasing memberships
in these bogus programs.
You Gotta Believe!
Promoters tell prospective Distributors that to
be successful "You gotta believe!" in the program. This is part
of a brainwashing/programming effort to lead you to believe that
you will fall into that (falsely) "successful" 2% if you believe
in the program and the products that it sells. Thus, active Distributors
will defend to great lengths their program and their products,
to the point of slandering naysayers, spamming "negative" or competing
sites with e-mail to shut them down, threats of physical harassment,
etc., etc., not to mention often buying the products themselves
in substantial quantity.
But the proof is in the pudding. It is an interesting
phenomena of MLM that the hardcore and brainwashed Distributors
who defend the products the hardest, almost always quit using
those "great products" completely when they move on to the next
The point of this is that the 2% of "successful"
Distributors have usually been brainwashed and programmed so that
they really believe the junk they are saying about the
junk they are selling. But that doesn't make it any less junk.
Building that Downline
The promise of MLM is that if you are "successful"
(in defrauding others) that you will create this big "downline",
i.e., multiple layers of sellers under you, which will quickly
lead you to riches and allow you to retire forever with a never-ending
stream of seven- or eight-figure revenue.
This promise is totally fraudulent, for at least
the following reasons:
As discussed above, the 98% drop-out rate means
that you probably will never build a significant downline.
None of these programs last very long (Amway
seems to be the sole exception), meaning that as soon as the
program croaks your revenue stops.
The odds of anybody in your downline making
any money are incredibly small (smaller than yours!), meaning
that they will probably "drop out" and be mad at you for getting
them into a program where they lost your money -- the upshot
being that these people will certainly not follow you to your
next program (which will be necessary when your existing program
finally collapses), meaning that you will have to build a
completely new downline with every new program!
For all these reasons, your chances of long-term
residual income with MLM is zero. Even if you are successful,
the best you can hope for is a lot of hard work defrauding others
to build your downline, some short-term profits until your program
collapses or is shut down, and then a lot more hard work defrauding
even more people into your next program, and so forth and so on
until you get sick of it and drop out of MLM completely.
Buying Your Own Products
To the extent MLM programs sell any product, it
is usually purchased by people who -- frustrated by their ability
to build a downline and pressured by their recruiters -- will
themselves buy mass quantities of the product as an attempted
badge of "success". Thus, newbies on the lowest levels will max
out their credit cards and buy lots of worthless product themselves
in a vain attempt to move on to the next level. Usually, this
works only if there is a "buy in" to the next level (more Quatloos
for the promoters!) but never means success to the poor sucker
buying the products, although he or she will end up with a closet
full of vitamins, shampoo, phone cards or whatever -- and usually
a lot of credit card debt too.
Fake It 'Til You Make It
Buying your own products is just one aspect of the
MLM method of "Fake It 'Til You Make It", meaning that even if
you are having zero success, you should act like you are very
successful and have already made the Big Time. Many programs will
tell people to start living a high lifestyle (on their own credit
cards, of course), go lease a new BMW, etc., etc., so that people
will believe that you are successful and they will then want to
be in the program too.
The problem of course is that only a small percentage
are successful in MLM, and these only for the short time until
their program collapses. Their debts and BMW leases, however,
are long term and require monthly payments to maintain. We have
spoken with a few people who were encouraged by Promoters to lease
expensive cars, and then were forced to actually live in those
cars because they couldn't make the rent (and of course the cars
were eventually repo'd from them too, leaving them homeless).
Additionally, the "Fake It 'Til You Make It" is
just more fraud on the people you are trying to bring in. Acting
like you are making the Big Bucks when you are not is blatanly
dishonest -- but all part of the MLM scheme of cheating people.
A variation of "Fake It 'Til You Make It" is the
"Heavy-Hitter" who bounces on the scene and seems very rich, and
then acts as a "closer" of new recruits. Whether or not the "Heavy-Hitter"
will actually have any money is subject to serious doubt: He may
be one of the people living out of his leased BMW! More likely,
he has been hired on a pure salary basis by the Promoters to act
as a cheerleader and "closer" for prospective Distributors.
The "Heavy-Hitters" usually circulate from program
to program, and are often the "Heavy-Hitter" in several MLM programs
at the same time. A good way to identify these scam artists is
to inquire as to what other programs they are in now, and have
been in the future. If they have been in several other programs,
you know that you are facing a "Heavy-Hitter", which when you
get down to it is just a professional MLM scam artist (and,
again, probably on a flat salary no matter what BS they tell you).
At seminars, you will frequently hear the Heavy-Hitter
buildup: "Maybe Mr. Such-And-Such" will be here today!" The excitement
is such that when Mr. Such-And-Such finally appears, you'd think
Moses just came down from the mountain. It is all hype: The Promoters
know exactly who will be at these seminars, and they plant people
in the audience to make statement such as these, so that Mr. Such-And-Such
finally does make his appearance, people attribute to him the
credibility of the Messiah. Don't fall for this ruse.
For reference, the "Heavy-Hitter" is not unique
to MLM. Casinos have for many years employed "Shills", being people
who are hired by the casinos on salary and given a bunch of chips,
and sent into the casino to mingle with the other gamblers and
spin a few stories of the casino's big payoffs (which may or may
not have occurred) -- and of course to gamble the (casino's own)
chips and thus encourage others to gamble with the same enthusiasm
and similar better levels.
The "Heavy-Hitters" perform the same function with
MLM, often coming in to tell false stories about themselves hitting
it big with the program. You can admire their gold pinkie rings,
and their expensive leather shoes. But avoid these people, and
just chuckle at the stories they sell. And be sure to ask them
about the lease program on that BMW they are driving!
Fending Off Criticisms
You may see your program mentioned in an unfavorable
light, such as on 60 Minutes or 20/20 or some other investigative
news program. The Promoters will tell you something like "Their
job is to bring down good companies . . .." Bull! Their job is
to point out scams, and if your program has been featured on one
of these program you can pretty much be sure it is one (if it
is an MLM program it is a scam whether it is featured on these
programs or not).
After you have made big investments into the MLM
program (or maybe several), are strung out on your credit cards,
and the program isn't working out, then you will go into what
is called "Survival Mode", where you finally give up the (false)
dream of big riches with MLM and start trying to figure out how
to hold off your credit card companies while getting back to a
Unfortunately, we don't have any special advice
to offer. The only thing that we can say is that suicide shouldn't
be an option (ex-MLM'ers unfortunately have a very high suicide
rate), and that you should simultaneously seek credit counseling,
and maybe adult education for re-education for a better job.
The worst programs will promise you some
sort of refund if it all doesn't work out. These are the worst
programs because the refund programs are usually contingent on
this-or-that, require long forms and long waits, often the refund
is only 30% or so of what you spent, and usually the refunds are
illusory (meaning that they company will never pay out the refund
to you). The MLM programs which offer refunds do this to create
the illusion that there is "no risk" to you -- and this is a 100%
fraud because as discussed, you odds of actually getting your
money back is infinitesimally small.
At least the companies which don't offer refunds
tell you this up front so that you are not suckered into believing