Multilevel marketing: Brand new names, same old games

“Very sad.”
“One of the low points in my life.”
“A horrible thing.”
“About 800 people are selling under me.”

These comments are from various people who have been involved in some aspect of multilevel marketing. Some felt they were victims, one is an active distributor, and one is in law enforcement. You may think that the era of pyramid schemes, Ponzi schemes and chain letters died with the disco days. After all, it was a popular idea in the 1970s that turned sour for many people. Some companies were prosecuted by various government agencies, and multilevel marketing got a bad rep.

But multilevel marketing is still very much alive — take, for instance, Bernie Madoff, who made off with billions of dollars in the grandest Ponzi scheme of all time. However, new buzz words now punctuate the sales rap, such as “networking,” “direct marketing,” “affiliate marketing,” “matrix marketing,” “home-based business franchising” or simply “the opportunity of a lifetime to build your own business and live the American dream.” It can be very tempting — and for some, the temptation pays off.

So how can you tell the difference between a legitimate business opportunity and a multilevel marketing scheme, even those that have remained legal for many years but still bear the hallmarks of a pyramid plan?

There oughta be a law
Gregory Brose is the Ventura County chief deputy district attorney for special prosecutions and said there are some red flags. “The key is,” Brose said, “are you getting most of your money from signing up new participants? Because if that is the case, eventually it is doomed to failure because you are going to run out of new participants.” Another warning sign is if you are told that you must sign up immediately or the offer will expire. Trust your instincts, Brose said, and take your time to investigate the company before joining any group.

“On the other hand,” Brose said, “if they really have a viable, valuable service or product that people are selling and it is the predominant way they are getting their income, then it could be a lawful enterprise.”

There are two laws on the books that address multilevel marketing. The first is criminal, California Penal Code section 327. In essence, it says that anyone who participates in an “endless chain” is guilty of a misdemeanor or felony punishable “by imprisonment in state prison for up to three years.” The crime is defined as a scheme where one pays for the chance to be compensated by bringing other people into the plan.

Another statute is California Civil Code section 1812.200, et seq. It deals with the seller assisted marketing plan or SAMP, and is designed to protect consumers from fraudulent business opportunity plans. “It covers the situation where the person providing this business plan opportunity offers to provide guidance or training or equipment, set them up in business, and then make sure they are going to have this massive income stream, if they take the right steps,” Brose said.

Brose said he was involved in prosecuting a case in Riverside County back in the 1970s. It involved raising rabbits for their fur, which was allegedly in great demand with a Paris designer. “They were going to make rabbit fur coats, and you were going to make a ton of money,” Brose said. “The rabbits were going to give up their lives for the coats.”

Of course, the extreme summer heat in the area killed a lot of the rabbits. So owners had the added expense of providing air conditioned indoor digs. Then, the worst part — “You were going to have to be a rabbit butcher and provide the skins,” Brose said. “It was pretty nasty.” He added that there was no designer in Paris who wanted to purchase the skins. “It was very sad.”

Brose advised that you ask yourself some basic questions. If this product is so great, why do I have to pay a fee for the privilege of purchasing it? Why isn’t it just sold like everything else? And why is the person selling the product saying they would like to bring me into the organization? Don’t they have enough sales people already? Won’t the market become saturated and then collapse?

Here are some personal stories from the front lines of multilevel marketing.

He was hot, she’s been got
Kelly (not her real name due to personal embarrassment) is 48 years old and lives in Westlake Village. Kelly said she dabbled in multilevel marketing back in the early 1990s, when she was much younger and eager to impress others. At that time, Kelly was working in a law office and was pursuing a career in real estate. “I was making a good living and was not desperate at all,” she said. “That was one of the pretexts used for finding people to go into this plan — find successful people. That’s how it was marketed to me.”

Kelly was selected by her sponsor in an unusual way. She said she met him when he followed her as she drove down the freeway many miles to the Beverly Hills area. He was in a very hot car, she said, and she was looking her best as she was heading to a party at the Beverly Hills Hotel. She pulled into a gas station, they traded business cards. He was in the industry that she wanted to break into, and they began to date.

A year later, Kelly said, he brought up the marketing plan while they were in bed. Kelly was open to the idea because, “I thought this would be a good way to impress him. I really thought I could do this.”

The plan involved selling water and air filtration systems. Kelly said it seemed to be a winner. “This is a great opportunity, the product is superior,” Kelly said. “Your market is anybody who breathes air and drinks water.” She said, “I thought, hey, I know a lot of people who breathe air and drink water.”

The first bright, flashing red light was that Kelly needed to buy product and lots of it. But Kelly was convinced that she could do it and succeed. She said she was not discouraged when she was unable to sell the products because she believed that she could recruit other successful people in her life to sign up as distributors. After all, this guy was so motivated and positive and charming.

“When I tried to recruit other people, I had to cloak it in the form of inviting them to a corporate briefing,” Kelly said. She convinced a couple of high-powered attorneys from her office to accompany her to a meeting. “When the meeting began, they started mocking it, and I knew that I had made a fool of myself. It hurt my credibility in my real world but in my network marketing world, my sponsor was loving it. When I look back on it, it was just a big hoax.”

For Kelly, the entire episode became very personal. Her sponsor was a player. “I found out about the other women involved in it by knocks on the door and phone calls in the middle of the night,” Kelly said. “And they found out about me, so, all of a sudden, there were girl fights.”

“I not only felt used, but I felt like I used other people,” Kelly said. “It is a terrible thing. And I couldn’t sell the products so I told my sponsor that I was going to back out. I said that I had $5,000 worth of product and asked what he was going to do about it.” To Kelly’s relief, he bought it back from her.

“It seemed like a good thing,” Kelly said. “You know, water, air.”

Tossing common sense to the wind 
Bob (not his real name due to pending litigation) is a man who had lived a conservative life in an arid region of California, owned his house outright, and a retired teacher. He admits that he did not use his best judgment or his superior math skills when he walked straight into a financial services multilevel marketing scheme.

Bob said the guy selling the services had a great opening presentation. “He said, ‘How can the money in the wood of your walls earn you any money?’ ” Bob recalled. “ ‘You gotta take it out of there, and make something happen with the money.’ ”

Bob said he was told to invest all of his money from the equity in his homes in what is called a variable universal life policy (VUL) at 12 percent for 10 years -- which is/was illegal though his "financial adviser" kept that tidbit of information to himself. He was then told that if he did that, he would be able to withdraw an income of $44,000 a year for 20 years. So Bob refinanced his home and took out $250,000. Bob was not doing his homework.

“He said I should use a power option ARM (adjustable rate mortgage), which would reset in three years to a conventional mortgage,” Bob said. “I was told to use the minimum interest option, which would mean negative amortization, which is when you owe more each month instead of chipping away at the principal.”

It gets even more complicated. “He was emphasizing the $44,000 each year and said because it was from a life insurance policy, it would be interest-free and tax-free,” Bob said. However, Bob did not consult with an attorney or an accountant or do any of the due diligence that is what professionals would recommend.

Although this deceptive financial arrangement is a bad idea, it got even worse, and Bob jumped in with both feet. “I was supposed to then sell this policy to someone else,” Bob said. “It was all based on friends and neighbors, and you were supposed to sign them up to do the same thing. It is all silver-tongued devil stuff.”

In the end, Bob has recouped his initial losses of well over $100,000. But litigation is ongoing against this group called World Financial Group. It has a checkered past with many fines over the years. Bob just did not investigate the group.

“It was too good to be true,” Bob said. “I feel embarrassed. I feel very bad about having gone to other people I know to get them involved. It’s absolutely a horrible thing.”

Raking in the dough from the top
With these stories about multilevel marketing, you may wonder where all the money goes. It goes to the top, the original people who joined the organization when it was just beginning. Some multilevel marketing companies have remained in business for decades. Are they legal? Yes. Are they pulling money from one person to shower it on another? Yes. Although Amway may come to mind, there is an even more established company that has been doing this for a very long time.

It is Shaklee Products.

Meet Margie Arendts of Thousand Oaks. Margie is a 72-year-old retired elementary school teacher, and her husband is a retired airline pilot. Arendts became a Shaklee Products distributor some 40 years ago.

Arendts became involved with Shaklee because she really liked their products. Now, it is about the multilevel part of the marketing. “Most of my income from Shaklee is from other people who are selling,” Arendts said. “I am still very active in recruiting other people to sell.”

So what will 40 years of plugging away in the same company get you? “I’m probably not exaggerating when I say about 800 people are selling under me,” Arendts said. “Forty years is a long time.”

Arendts eschews the hard sell for the softer side of recruitment. “Our approach is, these are the products we have available; if you are interested, fine,” Arendts said. “If not, you’re still going to be my friend. We keep it very low key because we want them to be comfortable with what they’re doing.”

To purchase Shaklee products, you must pay an upfront fee of $19.95 just to get the catalog. There are then two levels to become a distributor. The lower one costs $39.95, and the one with the bells and whistles costs $300. Of course, then there are all of the supplemental educational guides and meetings to motivate the ever-growing number of distributors. “Not everybody wants to become a member,” Arendts said. “And not everybody wants to build a business. So it’s a numbers game.”

Multilevel marketing has staying power because of its promise that by just following the company’s roadmap for success, you, too, can enjoy the luxuries reserved for only the wealthy. But remember, it is a game of numbers, and market saturation is a very real thing, especially during an economic downturn. And only a few can win at this game.