Why pyramid schemes are a scam. If you could recruit 11 tiers of distributors below you to provide you income, the number of distributors would have to exceed the US population.
Multilevel marketing (MLM) companies have a terrible reputation, so bad that Quackwatch devotes a whole section to “MLM Watch“. Now that we are in the midst of a pandemic, MLM schemes have been quick to take advantage of public fears and are offering bogus products alleged to prevent or treat COVID-19. Quackwatch’s Consumer Health Digest reported on September 6, 2020, that Plexus and five other MLM companies have been warned by the FTC about false health and/or income claims related to the coronavirus pandemic. The other companies are Youngevity, Vivry, Melaleuca, Isagenix, and Juice+. More false claims and more FTC warning letters will surely follow.
What does MLM mean?
No, MLM doesn’t stand for “Marketing Lies and Misinformation”, but it might just as well. Is it ever legal? Basically, it’s OK for a company to reward you for selling their products, but if it rewards you for recruiting other people who have to pay you, it’s an ethically and legally questionable version of an old scam, the Ponzi scheme or pyramid scheme. Ponzi schemes are named after Charles Ponzi, a businessman who paid profits to early investors from funds obtained from later investors, telling the early investors that the money they received was earnings from their own investments. It was a system for robbing Peter to pay Paul, and when it collapsed, the Peters lost all the money they had invested. Today, typical MLM Pauls get the Peters to do the recruiting for them. More and more Peters recruit yet more Peters in order to get a portion of the commissions earned by the Peters below them in the pyramid. Eventually, the Pauls at the top of the pyramid get rich, while the Peters further down the pyramid lose money.
How it works
The company offers an overpriced, difficult-to-sell product, often a dietary supplement, with grandiose claims that it is the best of its kind and will help customers lose weight or provide other health benefits. Think about it. If they had a good, reasonably priced product, why would they resort to MLM schemes? Reputable products can be (and are) sold profitably in stores everywhere.
A trusted friend or relative persuades you individually or invites you to a group presentation in their home, sort of like a Tupperware party on steroids. They offer amazing testimonials, offer to sell you products, and tell you that you can become a distributor too and earn lots of money effortlessly from home. You will start earning royalty payments after you buy a large inventory of their products (which you soon discover you are unable to sell), but the real money comes as you recruit other distributors and get a percentage of their commissions and get your recruits to recruit even more distributors. If you recruit a large enough stable of distributors, you theoretically might make a lot of money, but the reality is that the vast majority of recruits lose money. Only a few individuals at the top of the pyramids actually benefit. And there is a high social price, as friends and family realize they have been defrauded. Early enthusiasm deteriorates into disillusion, disappointment, customer complaints, and often regulatory actions and lawsuits against the company. Remember Amway, Herbalife, Young Living, and DoTerra. Episode 1 of the (Un)Well documentary series that I reviewed in August covered two disreputable MLMs that sell essential oils.
The FTC’s warning letters remind companies of three pertinent laws:
- It is unlawful to make unsupported claims of product efficacy
It is unlawful under the FTC Act, 15 U.S.C. § 41 et seq., to advertise that a product can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made.
- It is unlawful to misrepresent earnings claims
…representations about a business opportunity, including earnings claims, violate Section 5 of the FTC Act, 15 U.S.C. § 41 et seq., if they are false, misleading, or unsubstantiated and material to consumers. Express and implied earnings claims must be truthful and non-misleading to avoid being deceptive, which means that claims about the potential to achieve a wealthy lifestyle, career-level income, or significant income are false or misleading if business opportunity participants generally do not achieve such results. Even truthful testimonials from participants who do earn significant income or more will likely be misleading unless the advertising also makes clear the amount earned or lost by most participants. Your business opportunity participants and representatives must immediately cease making all express and implied earnings claims that would be false or misleading to current or prospective participants.
- MLM companies are responsible for what its representatives say
You are responsible for the claims of your business opportunity participants and representatives. As the FTC stated in the January 2019 Business Guidance Concerning Multi- Level Marketing, the compensation structure of a Multi-Level Marketing entity (“MLM”) may create incentives for its participants to make certain representations to current or prospective participants. As a consequence, an MLM should (i) direct its participants not to make false, misleading, or unsubstantiated representations and (ii) monitor its participants so they don’t make false, misleading, or unsubstantiated representations.
- boost children’s’ immune systems
- possibly keep them virus free
- a host of health conditions that affect children including asthma, eczema, ADHD, GI issues
Warning letters to Plexus failed to lead to corrective action
On June 5, 2020, the FTC sent Plexus a warning letter saying that the company and its representative had published false claims on social media alleging that their products could prevent or treat COVID-19. They gave specific examples and asked the company to review the claims, to stop making claims that weren’t supported by evidence, and to respond within 48 hours describing the actions they had taken to address the FTC’s concerns.
Truth in Advertising found that after the June 5 letter, Plexus distributors continued to make unsubstantiated claims that the “Kids Essentials Combo” (comprised of MegaKids Microbiome and XFactor Kids), would help:
Earlier violations
Before the current pandemic focused attention on coronavirus claims, Plexus had received earlier warnings about its products. An FTC warning letter in 2014 mentioned specific claims on their website that promoted their products as drugs, in violation of FDA regulations for dietary supplements. The products targeted were Fast Relief, Probio5, and Biocleanse. For example, Probio5 was said to typically provide results for jock itch, migraine headaches, recurrent cystitis, and vaginal infections. And Biocleanse claimed that many people were in a low oxygen state that allowed microbes to thrive and cause diseases such as flu, Candida, and chronic fatigue; Biocleanse was said to kill these microbes by increasing the oxygen level around them.
These claims meant the products were new drugs that were misbranded. And:
The introduction of a misbranded drug into interstate commerce is a violation of section 301(a) of the Act [21 U.S.C. § 331(a)].
Those claims have been removed from the website. The company website no longer makes specific disease claims but only “support and function” claims, which are allowed under the Dietary Supplement Health and Education Act (DSHEA). But Plexus distributors have continued to make disease claims in person and on social media, and the company has done nothing to stop them.
Conclusion: A typical MLM company, not trustworthy
Plexus is typical of so many other MLM companies that defraud their distributors with false promises of easy income and allow distributors to make claims for their products that the company itself can’t legally make, claims that are not supported by acceptable evidence. Legitimate products don’t need to resort to MLM schemes to make profits.
Stephen Barrett has investigated over 150 MLM companies with health-related products. He says:
Every MLM company I have looked at has made false or deceptive claims in its promotional materials. The products that have nutritional value (such as multivitamins and low-cholesterol foods) are invariably overpriced and usually not needed. The products promoted as remedies are either bogus, unproven, or intended for conditions that are unsuitable for self-medication. In addition, none of companies I investigated gave a really clear picture of how difficult it is to earn money selling health-related MLM products…distributors must persuade prospective customers that their product is superior even though it is not and may even be identical to competing products that cost less. This requires misrepresentation.
The National Council Against Health Fraud recommends that consumers avoid health-related MLM products altogether. I think that’s excellent advice.