I have just posted a Blog, entitled "Have I Got a Deal for You: The Endless Chain Offer." The Blog references the excellent article recently published by Bruce Craig, former Asst. Attorney General of the state of Wisconsin.
Many of us have debated, studied and written about the fraudulent practice of selling products (services, dreams, investments, training, etc.) by using an endless chain income promise as the marketing lure. Rewards depend on an ever-increasing number of other investors or participants also joining the plan. The "endless chain" is basis for all pyramid schemes, ponzi schemes, economic bubbles and financial manias. Recent events show it to be the most dangerous of all threats to global economic stability. It can distort pricing, ruin asset values, wipe out jobs, and make people crazy. Yet, it is still a largely unstudied or misunderstood form of fraud.
In much of my own analysis of the endless chains in multi-level marketing (MLM) fraud -- following the mainstream Federal Trade Commission approach -- I have focused on levels of retailing by the MLM salespeople as a determinant of MLM legality.
Yet, in recent months, mostly from conversations with Bruce Craig, and through my own defense in a defamation lawsuit brought against me by a multi-level marketing company, I have come to see more clearly that an endless chain is an insidious fraud, regardless whether the "downline" has retail customers or not. It is true that perhaps the harm to the victims would be lessened if all the salespeople could recoup some or all of their investments from retail sales profits. But the reason for their initial investment would have been based on deception by the perpetrators. The promised income could not be gained. All their time, effort and other capital investments would be lost. Also, many would not actually recoup their direct financial investments anyway since the "unlimited" recruitment rewards and the endless profusion of "salespeople" in all areas makes profitable retailing pointless and unproductive.
Often the so-called threshold of retail sales is said to have been met (3 customers for each salesperson, with both buying the same amount and paying the same price, with salespeople classified as both customer and distributor), yet, virtually none of the so called "distributors" is profitable. They are still paying out more than they gain in retail profit. Gaining the few retail customers (usually friends or family or phantom customers paid for by the salespersons themselves) is merely an additional "consideration" paid to qualify for the illusory endless chain rewards. The scheme is profitable at the expense of thousands of unprofitable salespeople.
Meanwhile, the promised income, that is based on building a downline, is reserved for the top 1% of recruiters. That fact is mathematically pre-determined and immutable. Offering it to everyone as the lure to draw investments, purchases and fee payments or to induce retail sales is "unfair and deceptive", that is, a swindle. Some state laws, Wisconsin's and California's for example, among others, plainly prohibit endless chain income or discount schemes, and they do not include any provision for a threshold of retail sales. The endless chain is recognized as an "inherent" fraud.
Unfortunately, due to the Amway federal court decision of 1979, the PR and lobbying of MLM companies, and the laxness of the FTC, "retail sales" has become the wedge that opened a chasm for endless chain promises to enter the marketplace, with multi-level marketing (MLM) as the standard bearer. The pyramid scheme was elevated to a "business model." And now, each year, millions of people transfer their last remaining savings to the MLM promoters on the futile hopes and dreams of building a huge downline and making the "unlimited" income that is promised. The endless chain income promise is the central and defining feature of MLM pay plans. Without its false but seductive lure, these schemes would collapse in weeks.
And since retail levels are the held up as the key factor for claiming legality, the MLM industry has gone to great lengths to ensure that data on retailing cannot be documented. They claim not to know retail sales levels or any other facts about "end-users" or that the data is impossible to document. In fact, this is because, in most cases, the retail customers don't exist! So, a factor (retail sales levels), that it essentially irrelevant to legality, is held up as proof of legality, and then that factor is hidden from the public or regulators to document. The legal defense is both irrelevant and mythical.
MLM has been described as the greatest of all American scams, but the legal defense of MLMs may be an even greater scam.
Robert FitzPatrick, Pres.
PYRAMID SCHEME ALERT
PYRAMID SCHEME ALERT