Nu Skin halted promotional meetings and applications in response to government concerns in China ( here). For ten years (2004-2013) Herbalife publicly offered no assurances that its distributors would comply with its policies (see, "As a result, there can be no assurance that our distributors will…or comply with our distributor policies and procedures." in annual reports). Unlike franchising, where franchisee actions are contractually defined, MLM companies admit to an inability to control the behaviors of their agents. The "business opportunity" is key to understanding MLM companies and regulators. However, only the MLM model connects retailing with what seems a largely unregulated "business opportunity" that purports to provide an opportunity for life-changing wealth. Fraud and misrepresentation have, of course, occurred in other industries, including traditional direct selling. The DSA president has publicly recognized the existence of pyramid schemes that " disguise themselves as legitimate direct-selling companies." Accusations do not a conviction make however. MLM companies have accused each other of making false claims, criminal behavior, potentially operating pyramid schemes, and the Direct Selling Association (DSA) of outdated ethics. Similar accusations against other MLMs (e.g., Amway, Mary Kay, Vemma, and Wake Up Now) can be found with little effort ( here, here, here, and here). The company also settled accusations in multiple states and in Canada ( here). Nu Skin ( NUS) faced media scrutiny in 1991, FTC allegations in 1994 that representatives misled customers, and an investigation by the Chinese government in 2014 ( here). A recent class action settlement also excludes any admission of wrongdoing ( here ). Accusations by Bill Ackman brought more stories and evidence ( here ). A 2013 exposé accused a top Herbalife distributor of lead generation and another in 2014 showed product misrepresentations. I found no public evidence that California followed up on newly agreed-upon reporting. In 1986, Herbalife ( HLF) settled with the FDA and California regulators without, of course, having to admit wrongdoing. Producing an unsurprising result, five years later the FDA began "an educational campaign against door-to-door selling of various food additives and vitamin preparations" designed to counter "a violent signed to convince the American that he has some peculiar 'deficiency'." In 1973 the New York Times reported, "Pyramid sales…are currently the number one consumer fraud in the metropolitan area." Let's start with product and/or earnings misrepresentations that first appeared on the government's radar more than sixty years ago, when the FDA secured an injunction "prohibiting 15,000 door-to-door salesmen from making 'extravagant therapeutic claims' for Nutrilite." The company agreed, "not to make certain therapeutic claims," but did not admit fault, establishing a pattern between regulators and the industry for decades to come. I wonder why regulators have failed to control behaviors found in pyramid schemes and seemingly endemic to the MLM model, two structures so functionally similar as to prompt early FTC action (see Koscot). Below I argue that: 1) industry critics, business journalists, the Direct Selling Association, and even MLM companies recognize an ongoing potential for fraud, 2) regulatory action and inaction, primarily by the FTC, demonstrates an unresolved tension between managing (i.e., decreasing) fraud and preserving the purported MLM "business opportunity," and 3) an apparent inability to resolve this tension led to a national failure to provide a reasonable level of consumer protection against MLM fraud.Īfter years of research some industry critics wonder if all MLM companies must inevitably be pyramid schemes.
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