Book cover art for Ponzinomics
Ponzinomics
Robert FitzPatrick

A thorough history of the MLM phenomenon that pulls no punches about how universally immoral, fraudulent and cult-like they are. Suffers from repetition in parts, but worth it to gain a deep understanding of where these institutions came from in the first place.

'Those who encounter enterprises such as Amway, Nu Skin, Mary Kay, Avon, Usana, and hundreds of others, have a universal experience: loss.' (Page 2)

Herbalife - a Cautionary Tale With a Long History

99% of people involved in MLMs lose money. And not just the people that get recruited, either. Sometimes it's the big hitters on Wall Street that get stung, too.

Take Bill Ackman, for example.

In 2012 Ackman, via his hedge fund Pershing Square Capital, went short on the publicly traded company Herablife to the tune of one billion dollars.

He did this because he believed Herbalife to be a pyramid scheme, and he launched a four year campaign to get this acknowledged on Wall Street. His actions sparked a long and bitter war of attrition, with much mudslinging in both directions.

'The FTC found that virtually no one who enrolled in Herbalife's plan and made the purchases ever received the promised rewards. The FTC concluded that all promises and claims about "income opportunity" were deceptive.' (Page 9)

Even after these findings, and much dithering, the FTC finally took action in 2016... but nowhere near enough. They fined Herbalife $200M, did not call it a pyramid scheme and set a bunch of unenforceable settlement terms.

'The business media seized on what the FTC did not do: charge Herbalife with running a pyramid scheme.' (Page 10)

'Herbalife, and all other MLMS, are defended by millions in campaign contributions made to Congress members who also oversee the FTC's annual budget.' (Page 11)

After this, it emerged that Herbalife had been receiving advice from Jon Leibowitz the immediate former head of the FTC.

This was an unusual rabbit hole and social phenomenon that Ackman had thought he understood. He thought it was a clear cut, simple affair. Little did he know how ingrained in society that the immoral and unethical practice of multi level marketing had become.

It All Started With a Fake Vitamin Pill

Vitamins were first discovered (and then immediately marketed by charlatans as miracle cures) in the twenties and thirties. It was the perfect con: you could simply create pills with nonsense ingredients that the consumer could never hope to verify, then lean on the pseudo-scientific spin you'd put on it thanks to the association with real vitamins.

Carl Rehnborg created his own pill of this type in the thirties, calling it 'Nutrilite'. It was primarily made of ground up alfalfa, but he claimed it had innumerable health benefits. There was no evidence of this at all.

'Like all such products, its ingredients were not fully disclosed or ever tested for health benefits or potential harmfulness. Rehnborg had no evidence any that the product provided any practical health value at all.' (Page 33)

He also started telling people that his previous years in China—where he had mostly failed at selling milk powder but succeeded at selling toothpaste—were spent 'in research'. Which is nonsense. He also attempted and failed at any number of different means of getting his flagging business to make more sales

'The Nutrilite distributors had been trained to repeat the falsehoods both to consumers and, more importantly, to all prospective distributors, vastly multiplying the deception.' (Page 47)

How to Con Friends and Swindle People

'[How to Win Friends and Influence People was] an early example of the "self-help" genre that was previously directed at salespeople for teaching commercial persuasion techniques, but would later go mainstream for effectiveness in all areas of life.' (Page 53)

It all changed for Rehnborg, though, with his attendance at a Dale Carnegie course. This was at a time where historian Richard Huber argues the nation was going through a shift 'from character to personality' and everyone was becoming a salesman.

'Carnegie's book, How to Win Friends and Influence People, published in the depths of the Depression, 1936, taught a way of survival not by forming labor unions, supporting social safety nets, or seeking full employment – but by privately reshaping one's own personality to get along and succeed on an individual basis.' (Page 45)

It became a way of looking at people—friends and family included—as sources of personal profit. It also heralded the growth in popularity and normalisation of a different sort of mentality that made people short-circuit their own critical thinking.

'...techniques involving constant repetition of thought-stopping aphorisms, e.g., "only quitters lose and only losers quit resulting, as Orwell explained, in an inability for followers to hold contrary thoughts or to formulate questions. It constructs a parallel reality with alternative facts. Some would later call it brainwashing.' (Page 50)

Rehnborg met two other salesman at this Carnegie course, and they would eventually join Nutrilite: Lee Mytinger and William Casselberry.

Architects of 'The Plan'

Mytinger and Casselberry were the original creators of the multi-level pyramid marketing scheme. They had previously worked in sales for another company where they resented not being able to keep as much commission of the salesmen they recruited underneath them. Those salesmen would keep

'Mytinger went on to proclaim that if he ever got his "own deal someplace," he would figure out a way so that “I keep the income from the people I develop."' (Page 64)

After joining Nutrilite as distributors, they set to work on fashioning a system where they could benefit perpetually. Instead of bothering too much with sales, they would focus on recruitment and retention. Distributors would pay to join and then a cut of all their sales would always head up the 'line' to those at the top.

'Mytinger joked to Casselberry that if the first 10 agents each recruited two agents, there would be 20 more agents. And if they, in turn, each recruited two, there would be 40 more agents, and if they worked hard enough, “everyone on earth would eventually be selling the product!"' (Page 65)

It was structured in such a way that the bottom 96% of all those recruited would never make any money.

'Mytinger and Casselberry were, of course, designing a novel version, never before seen in the sales world, of the classic pyramid scheme.' (Page 72)

The MLM Blueprint

The fundamental difference between 'ordinary' sales and MLM is that the commodity becomes the person themselves. The whole point is to recruit people and begin to drain money from their bank account, and persuade them to do the same to as many others as possible. Wealth is only ever transferred in one direction.

'Among families and social networks, persuasion is fundamental to the viral spread of "pyramid selling," aka, multi-level marketing, resulting in the defrauding of closest associates.' (Page 91)

The mathematics of an MLM is inherently self-defeating. If it truly was a legitimate model, it wouldn't rely on recruitment at all and you could just make money at any level. Not to mention that the 'products' in these businesses—soap, vitamins, protein powder, makeup—are almost always commodity items that you can get from most stores, online and off.

'To gain the promised income in MLM, you have to recruit. Selling door-to-door at a marked-up retail price is absurd in the era of eBay, Amazon and Costco.' (Page 106)

There is little regard for the real demand for these products in all of this and MLM products are often marked up to extortionate levels, recruitment becomes the only goal. Recruiting people in your geographical area would be a problem if you were actually going to compete on selling products but, of course, you aren't!

An early tactic was 'five get five' where you would bring five friends on board, then get them to do the same: 5, 25, 125, 625... and so on. However, if you follow this for 14 levels you run out of people on planet earth.

'there is no sustainable retail customer base, no real demand for the goods, no need for a personal salesperson and therefore little to no retail selling. But there is a tremendous market for "income opportunity."'

And here lies a real problem—there are a lot of people who want to make more money and don't know how to. With the person becoming the commodity, there is a huge incentive to sell a dream to people without a hope.

[The] market has been drawing in more people since MLM was begun in 1945 and then grew tremendously since the mid 1970s. Today, it includes students with college debt, seniors facing mountains of medical bills and disappearing savings, families with unbearable rents, people already working two jobs, immigrants trying to survive, and military spouses facing multiple deployments, among others. The income-opportunity market is exploding!' (Page 110)

Anatomy of a Pyramid Scheme

Endless Chain

You must always recruit and keep on recruiting. It is the only thing that is rewarded and is endlessly chopped up into different ranks and levels. In any other sales organisation this would be entirely pointless and confusing to everyone involved.

Pay to Play

There's an enrolment fee and a monthly quota to hit. But...why? There's no sales territory, you can't advertise on display media, there's no company advertising and even more salespeople keep getting recruited around you.

Recruitment Mandate

There's nothing more important. Just bring new people on board so that they can start 'paying to play' and do the same again to their own friends and family.

Extreme Bottom-to-Top Cash Transfer

Normal sales would see the majority of a cash commission go to the person at the bottom who made the sale. This is inverted in a pyramid scheme, with the majority going to the top.

Secrets of the Pyramid

As soon as Nutrilite used 'the plan' it exploded, reaching $26M annual revenue in less than 10 years.  This had nothing to do with their product which, by all accounts, was still utterly useless.

Eventually, the market was so saturated that virtually everyone was selling vitamins. Around this point, two distributors left to form their own MLM. Their names were Jay Van Andel and Richard DeVos. They called their new MLM 'Amway'.

Amway was instantly successful and they bought Nutrilite and absorbed it into their business. Their success was so great, in fact, that they were famously taken to court by the FTC.

'The question as to why almost 200,000 people a year would sign up to gain average "retail" profit of less than $3 a week – before expenses from selling laundry soap seemingly did not occur to Judge Timony or Commissioner Pitofsky.' (Page 134)

During this FTC trial, there was no jury, only an ALJ (administrative law judge), James Timony. Amway merely had to convince this one person that they were not a pyramid scheme...and they did. Since then, everyone has touted the claim that 'the FTC exonerated Amway and, therefore, all MLM thereafter' when, in reality, it came down to the opinion of this solitary judge who, by all accounts, seems to have been deceived just as much as any other Amway recruit.

'The story also convinced the Judge that although almost no recruits ever made a net profit, Amway's extraordinary references to "unlimited" income were not callously deceptive and capable of causing a mass mania. Rather, in the tradition of Dale Carnegie courses, these references were merely "inspirational and motivational." The FTC agreed with this and the Commissioner affirmed the view that "generalized" income claims by Amway were not misleading, calling them "vague 'puffs,' which few people, if any, would take literally..."' (Page 136)

Amway basically introduced their own materials as evidence and 'proof', which was circular, and the judge basically took them on their word. The rest is history.

'Judge Timony dismissed the entire phenomenon later to be identified by cult experts and psychologists as "undue influence" and mind control and by others as the classic “Big Lie."' (Page 137)

'Believing in the 1979 Amway ruling requires faith. Inquiry becomes heresy.' (Page 157)

Propaganda

Rich DeVos climbed within the GOP to sit as chair of the National Finance Committee while Jay Van Andel became chair of the Chamber of Commerce at the same time. This was powerful influence that they put to good use.

Their generous donations (including a $45M to Reagan's campaign) and their canny political manoeuvring allowed them to get a seat at the table and audiences with the white house. The Reagan presidency also happened to mark the start of the era where wealth was transferred primarily upwards, not evenly.

This trajectory culminated in 2016 with the election of long-time MLM cheerleader Donald Trump who promptly made Betsy DeVos, Amway family member, his secretary of education.

'The self-evident truth of endless chain fraud on which the Wisconsin statute was written was set aside. This allowed Amway and other MLMS to sell an impossible income proposition, collect fees in advance, and then publicly blame the victims themselves for their losses. Pyramid Scheme prosecution was now "politically impossible."' (Page 153)

Mind Control

'The Black Hat recruiters and the company owners play the roles of guru, the holders of ancient secrets to success, totally fulfilled and enlightened persons. They persuade recruits that they must become like them or be doomed to live as "losers.'' (Page 112)

MLMs use a wide array of techniques to persuade and control their members. The MLM itself cannot be held culpable for anything, and any failure is automatically the fault of the individual.

'Holding ceremonial spectacles in enormous stadiums and posing on stage as high priests possessing sacred secrets, MLM promoters tout their schemes as the fulfillment of the mythic American Dream. They flaunt their own wealth as proof they can align the stars, so to speak, to deliver success and happiness to followers.' (Page 117)

Large conference events would allow the MLM to indoctrinate the attendees who had paid to be there. They would primarily hear from successful 'upline' representatives who would talk about their unbridled success when, in reality, they were just as broke.

'In reality, the actual "income" source for the bragging and sanctimonious speakers at Amway's "motivation" rallies was the money the audience members paid to attend the events. Unsuspecting attendees were exhorted to "never quit," "believe," and buy the speakers' books and tapes.' (Page 165)

There was and is a culture of 'education' where the successful would demand their downline recruits purchase their tapes and seminars. These materials were often the main source of income for the upline—not from recruiting.

'The "tools" were books, audios, and videos produced by the leaders and sold at enormous profit margin. The followers were instructed to listen, read, and watch the materials constantly, day after day, and to purchase new materials weekly.' (Page 272)

Cult Status

Cult qualities:

  • Elitist, 'special', and different
  • 'Us vs them' mentality
  • Winners vs losers
  • Secrets (to success)

'According to dogma, any losses suffered among members are only due to those members' individual failure of judgment  or lack of effort or loss of faith. To ward off negative thinking or doubts that might cause losses, the believers are trained to maintain a perpetual temperament of blue-sky optimism and to repeat nonsensical aphorisms that short-circuit logic. The faces of the believers are always smiling.' (Page 264)

'Organizationally, we would have explained, the MLM cult is elaborately ranked. The wealthiest hold the status of gurus and  prophets. Those that lose deserve and caused their plight, in that fantasy world.' (Page 266)

'To complete the necessary ingredients of a cult movement, MLM's earliest promoters, like so many that followed, assumed  playbook roles of holders of ancient secrets to wealth and happiness. MLM did not rely on a single cult leader. It precisely scripted the role for thousands of actors to play the part of prophet and in the multitudes of tentacles of new "companies" and the guru "lines of sponsorship." All would trace back to Nutrilite and its MLM architects, Mytinger and Casselberry, with Amway generating the greatest number of cloned descendants.' (Page 282)

The Story Today

'Current Main Street realities - low pay and limited job market, rising student debt, unaffordable housing, and bankrupting healthcare costs provide fertile soil for the Ponzinomics fairy tale to take root.' (Page 158)

MLMs tap into national beliefs about how things are, how they should be, and how bad things really are. There is a universal assumption that a business could never be a bad thing, or a cult, or fraudulent in these ways.

The FTC has prosecuted 26 cases against different MLMs in the twenty years between 1996 and 2016. No correlation was noted; they were all 'outliers' that didn't represent 'legitimate MLM'.

'Currently in 2020, there is no consumer protection organization with dedicated staff or resources that a consumer could turn to for representation against MLM. To my knowledge, there is no current member of Congress speaking up about MLM as a major consumer threat.' (Page 307)

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