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MLM Industry 'Income Averages' And 'Retail' Sales Claims Are Part Of Deception FTC Must Halt

Nov. 03, 2016 10:37 AM ETHerbalife Ltd. (HLF)NUS135 Comments
Robert FitzPatrick profile picture
Robert FitzPatrick


  • FTC Chair, Edith Ramirez, called out Direct Selling Association, DSA, for deceptive income claims by its members. To identify pyramid schemes, she defined "retail" as profitable distributor sales to non-distributors.
  • Ironically, she began her admonishment and warning to the DSA to stop income deception by citing DSA statistics on "income averages" and retail sales as factual baselines.
  • DSA bases MLM legitimacy on MLM "retail" sales, said to be $36 billion, and on providing a viable income opportunity to 20 million consumers, said to be $2,400 "median" average.
  • Simple math, basic marketing, and common sense reveal that the retail sales volume and "median average income" are statistical fabrications. Retail sales are minimal. Median average income is zero.
  • Upcoming FTC guidelines for all MLMs must be based on market reality, investigation, and hard data. FTC credibility and law enforcement are compromised by accepting any DSA data as factual.


Ms. Edith Ramirez, Chair

Dear Ms. Ramirez:

As an author, researcher and a voice for thousands of consumers who have asked for proper law enforcement on "multi-level marketing", aka, MLM. I applaud your recent statement to the Direct Selling Association, DSA. I offer personal thanks for your directness in addressing fundamental aspects of pyramid scheme identification, MLM income recruiting incentives and court rulings that guide FTC policy.

In this letter I address the elements of your presentation related to deception about "income" and "retail sales." As you stated, false income claims are the primary lure in recruiting frauds. Their value for recruiting and their consequent harm only increase as the ranks of underpaid, part time, unemployed, gig-employed, and debt-burdened Americans grow.

I address deception not by individual MLM companies, such as you have uncovered at Herbalife (NYSE:HLF), Burnlounge, Fortune High Tech Marketing, Vemma, and other MLMs, but the underlying deceptions spread by the Direct Selling Association itself that crucially support the deception of individual companies. These DSA-based deceptions have greater impact on consumer vulnerability and are of greater importance to the FTC's law enforcement than the exaggerations and phony testimonials and images of wealth do, though such trickery does play an important role in the entrapment.

The DSA-based deceptions lay down the foundation and erect the rationalizations that bring millions of consumers into MLM recruiting scams in the first place, seeking "extra" income from "direct selling", often despite their misgivings about the high income bombast. It is only following these baseline, preparatory deceptions that consumers are lured further into the trap with promises of "wealth beyond your imagination."

The high-income deceptions are layered atop two specific and foundational deceptions promoted by the DSA (1) that MLMs provide an "average" income of hundreds of dollars a month to millions of

This article was written by

Robert FitzPatrick profile picture
Robert L. FitzPatrick is the author of the new book, Ponzinomics, the Untold Story of Multi-Level Marketing (2020),the first comprehensive history and analysis of the "MLM" phenomenon, addressing its political influence, propaganda techniques and use of cult persuasion. FitzPatrick is an expert in examining and revealing deception and fraud in Ponzi schemes, pyramid schemes and bogus home-based businesses. He served as expert or consultant in more than 30 court cases involving pyramid schemes and multi-level marketing. He is co-author of False Profits (1997), an examination of the values and beliefs that support the delusions of pyramid schemes. He was featured on NBC Dateline, ABC World News, and CBS 60 Minutes, the documentary film, Betting on Zero and the podcast, The Dream.He has been quoted in many newspapers around the world, including the New York Times and Wall Street Journal. His booklet, Pyramid Nation, has been translated to Chinese and used by government regulators in writing China's first laws on pyramid schemes. His booklet, "The 10 Big Lies of Multi-Level Marketing", has been translated into four languages and posted on numerous websites. His White Paper, "The Main Street Bubble", which details the extensive influence-buying of the direct selling industry was featured in a CNBC Documentary, Selling the American Dream. In 2005, he delivered a seminar to in Colombo, Sri Lanka to central banking representatives from that country as well as India, Bangladesh, Bhutan, Maldives and Nepal. Robert FitzPatrick has developed informational resources for consumers, journalists, academics and regulators including a multi-media PowerPoint presentation and a statistical analysis of the losses suffered by participants in pyramid selling schemes. He also published a widely read booklet on the landmark federal case brought against the Amway Corporation. He is a expert network member of GLG Research, and Coleman Research Group, as well as other networks of experts who are referred to clients for consultation, speaking and report writing. In this capacity, he has provided expert consultation to financial many analysts who sought information about multi-level marketing companies and pyramid and Ponzi schemes. Robert FitzPatrick co-founded and serves as president of Pyramid Scheme Alert, the first international organization to expose and prevent pyramid scheme fraud. He personally responds to hundreds of consumer and news media inquiries each year. He has served as consultant and expert witness for Attorney General or State Attorney offices in four states, the US Dept. of Justice, and in numerous cases involving distributor fraud and pyramid schemes. Robert FitzPatrick is not an investor in multi-level marketing companies. He has never owned and never plans to own stocks of multi-level marketing companies. He has never been compensated based on any stock's performance. He does not offer investment advice and he is not an attorney.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (135)

six profile picture
And we get right back to selling HLF... again down...
six profile picture
Even Trump has not helped HLF....
HLF Friend 1 profile picture
6 ... I think your being short sited ...Good news
six profile picture
Not so much...
six profile picture
HLF keeps falling... even with Icahn buying some the share price continues it's descent...
HLF Friend 1 profile picture
Is Ackman down about 100 % since his Short and all this Started ? ... YES...Has Herbalife Beat earnings in almost EXERY Quarter since going Public , including the last few ?.. Yes... This 2016 last I checked ... not 2011 ... and Trump understands MLM ... Talk among yourselves ... Great for MLM ... The RNC and MLM check it out ... Like the Banks and other over Regulated Industries good for Business.. Last I checked Carl & Donald both had & have a MLM ... Donald didn't do that great but was a Spokes person for ACN for Years before Starting his own . I think he likes MLM ... Just saying
The Whole Truth profile picture
""Yes... This 2016 last I checked ... not 2011 ""

The Herbalife stock was higher in 2011 than today. :)
"Donald didn't do that great but was a Spokes person for ACN"

Correction, he was a PAID endorser for ACN, and quickly distanced himself from them once they were exposed!

HLF Friend 1 profile picture
NO ... read the article .... Then started his own MLM
HLF Friend 1 profile picture
Really ? How about Beating earnings Quarter after Quarter .. Fundamentals ..Very undervalued Better MLM relations with the Republicans ...
The Whole Truth profile picture
LOL, ""beating earnings quarter after quarter.""

And yet the stock is lower today than it was in 2011.
The Whole Truth profile picture
"""Longs have all the hopes pegged to Icahn buying HLF or cutting a deal to take them private."""

That does seem to be the only scenario where the longs win out.
ceo resigns--replaced buy unknown from within
six profile picture
Ackman makes HLF fraud public through a large short position... HLF stock tanks...

Icahn takes a large long HLF position and stock rebounds....

Ackman's public expose of HLF prompts the FTC to investigate HLF....

HLF claims the FTC will exonerate them... Icahn echoes that sentiment...

The FTC concludes their investigation and although they don't shut HLF down, they agree with every point Ackman accused them of.... and fined HLF $200M, required they make substantial changes to their business and pay for an independent auditor for 7 years...

HLF and Icahn publically call this a victory...

HLF stock soars...

Then HLF release quarterly results and the stock falls...

Longs have all the hopes pegged to Icahn buying HLF or cutting a deal to take them private.
The Whole Truth profile picture
""Most DO come for weight loss""

You've said it but you've never been able to substantiate it.
six profile picture
Funny... there is no proof that HLF products do anything that helps with weight loss.... sort of how there is no proof that anyone makes money retailing HLF product.

However, there is substantial proof that many join HLF in an attempt to make money and fail.
Middlepath profile picture
There is a boatload of proof linked to google. Start with yourself if you want. Use the product, loose weight. 20 lbs off no problem, that easy. Similar products also work, but they don't have as good of a taste or selection. A vegetable juice only diet leaves one feeling too hungry. Have you ever seen very overweight people at a HLF convention or even wearing a green Herbalife shirt?
six profile picture
Proof, as in an independent scientific study that has results indicating that HLF product helps weight loss...

NOT a "Goggle search"...
HLF Friend 1 profile picture
TRUTH ... Most DO come for weight loss ... Some earn part time income ... No one believes they get rich on MLM Easy for many Years ... Those days are long over ... If you believe Amway and Herbalife Grow by Fooling People ... 180 Billion in sales World wide
six profile picture
Ok.. then HLF can stop recruiting and survive right?
The Whole Truth profile picture
That's the MLM defense. That the distributors are really just customers.

But people are not recruited to be customers right? Instead they are shown luxurious things like mansions, Ferraris, yachts and fancy vacations. They parade people around who say they retired at the age of 27 and they are now set for life.

But we're supposed believe that people join for product discounts because they like average quality products at premium prices. I'm not buying it.
They are lured in by the bogus opportunity of "owning a business", when in actual fact, they are merely clients, and not just for products/services, but for monthly access fees, training materials, pay-to-attend seminars and even pay-to-attend annual conventions. And they're in bed with self-help authors and gurus also feasting on the misery of "reps" chasing their dreams. Even when their corporate execs retire it doesn't end, as they usually write their memoirs, for sale to their failing forces.
Rbbrooke profile picture
There is a lot of truth here and it obviously hurts....because it is true. And there is a part of the story that is worth being told that the "consumer advocates" choose to ignore or don't know about.

I might be one of the people you despise.....40 years full time as a network marketer. I have both been a very successful sales leader and have owned two MLM companies.

We have had a "preferred customer" program since 1995 so that we could track and nurture some of the customers. There is no way to track customers who buy direct and take possession direct from a distributor...there is also no way to nurture them. This is one of the flaws of old school MLM. The company does not know who is and cannot contact the actual customer.

My companies have always had as many actual trackable customers...that never became distributors as we have distributors. There are many DSA member companies that can claim this...and prove it. Unfortunately they are not the old school and they are not the multi billion dollar enterprises but they are growing and someday will be.

It is also probably true that 99% dont earn any income in some companies. More like 90% in some companies like ours. But here is what is also true....90% of the 90% never attend an event outside of their home city; never invest more than $50 in becoming a distributor and never enroll one customer themselves. They very quickly settle into being a customer themselves after experiencing how difficult it is to promote a product for sale to your friends and family. There are the cases where people are so committed and so in love with the culture of the company that they do travel, try repeatedly and never succeed. I have seen people spend thousands before they give up. it is rare but it happens. I imagine if you documented their journey it would make for good TV drama and SA articles. We train heavily against it, we watch for it but we cannot absolutely control it. If we somehow eliminate the opportunity to fail we also eliminate the opportunity to succeed. It is afterall a business opportunity...not a government job.

One thing SA and the anti MLM establishment get wrong is the definition of a customer. The DSA has done a poor job of establishing this. And the FTC lawyers in the Vemma case lied to a federal judge about what they guaranteed they would find if he allowed an injunction. Vemma certainly had a culture of hype but they also had a culture of customers....by my definition. A customer is anyone purchasing product wherein in the commission cycle of purchase in it, the purchase does not qualify them to earn commissions or any other perks,favor or standing in the organization. Given this definition there can be no other motive for ordering than the person wants the product. Price paid never has anything to do with whether or not someone is a customer. The fact is 90% of sales TO Distributors are really just customer sales. These distributors have given up on making money...they do not have a team on which to get paid and their motive for ordering has nothing to do with getting paid. Contrary to some theories, I have never met a distributor that orders product they dont need , on which they will not get paid just so they can be part of the cool kids. I am not saying it doesn't happen...it just does not happen in most companies.
78% of Vemma's sales volume every month went to people that did not get paid. They were customers who loved Vemma products. The FTC promised the judge that if he issued an injunction the records would reflect 90% of sales would be to new distributors buying their VIP packs. I was there. I heard exactly what they said. They lied to a federal judge...not because they intended to but because they had a built in bias and ignorance. They killed a global 200 million dollar company ( thousands of jobs and hundreds of ancillary businesses not to mention 10,000 distributors that relied on their commissions) when a fine or an open investigation would have sufficed.

Bottom line of my response is that there is a lot of good under the tip of the iceberg. Certainly there is fraud, deceit, manipulation and hype in some companies...perhaps many. But I can assure you not most. I know most of my competitors. They have great products, most of their sales go to customers and they have hundreds to thousands of good ol American success stories. If you studied those as vigorously as you study the failures you would find some balance and some enlightenment in your views.

Ps. I wonder how many people lost how much income and life savings from Ackman shorting HLF and then investing $50 million in attempting to drive the stock into his profit zone. That is about as corrupt an act as i can imagine but I bet you defend it.
The Whole Truth profile picture
"""The fact is 90% of sales TO Distributors are really just customer sales. These distributors have given up on making money.."""

So a customer to you is someone who joined and wanted to make money by running the biz op, but failed for whatever reason? Now instead of a failed distributor, you consider them a customer?

If that were true, given the attrition rate, MLM would rival Walmart.

What I see is a bait and switch scam. Come join the biz op and make money, retire early and buy mansions and luxurious vacations. Instead they are stuck with average quality products that come with premium prices.
Rbbrooke profile picture
We see what we want to see. I didn't say most failed distributors remain customers...what i said was most distributors who order are just customers.
The Whole Truth profile picture
""what i said was most distributors who order are just customers.""

Ok, thanks for clarifying. However, per the recent FTC settlement with the FTC, these folks will not be considered customers and a lack of actual customers will affect bonuses for Herbalife distributors.
it will be funny when the stock busts 51--the coulda shoulda woulda level

if the stock makes a new low for the week today, on a friday, chart will look awful---hello 40's!
six profile picture
If the FTC had not allowed MLM exemption from the Business Opportunity Rule there would none of the obfuscation and exaggeration of income that MLM need to thrive.
six profile picture
The Business Opportunity Rule exception that MLM was granted is a great example of regulatory capture and how our system tries to work with big money fighting it every step of the way.

The Business Opportunity Rule would have ended all the bad MLM behaviors in one swoop, the recent FTC investigation and actions would have been unnecessary.
add to shorts if the stock gets anywhere near 60

sadly, that does not seem to be happening--icahn's purchase was accomodated by plentiful sellers, and today players have greeted the purchase with a shrug--and in my case a head shake--guy really seems to have gone bonky
Rogier van Vlissingen profile picture
Indeed, thank you Robert, for this clear-eyed review of the depths of deception of DSA rhetoric.

In my own exposure to MLM i've seen and experienced, how the system tends to suck people in to spending more than they make, and then, during the Herbalife investigations I've met many of the people who have lost far more than they ever "made" in MLM, as much as $250K in one case, but including divorces, evictions, loss of life savings, and property, and loss of many friendships and often loss of viable jobs.

It would be my estimate that, taking into account the moneys and resources people spend on their MLM endeavors, the consumer losses are likely three times the amount of retail "sales" that the industry claims. As a result, in the US alone, the MLM-racket is a bigger scam than the whole Madoff affair, and it is painful to see how the FTC gets sucked into validating the scam over and over and over again. Regulatory capture is alive and well. The FTC/HLF settlement is useful only if it is rigorously enforced, and that should include the SEC pursuing the persistent lies to investors that are now in evidence. Clearly, the only chance of cleaning up this massive consumer scam is likely to be a rigorous RICO prosecution of the top instigators of these scams. Nothing else will do, for it will just continue to fester.
Agreed. Criminal prosecution of a corporation is a good first step, but to truly force change/compliance, prosecution of executives is an effective deterrent to the ongoing spread of deception. And the DSA as a willing accomplice as well.
six profile picture
Icahn's purchase was a desperation move... it is clear that Carl is not taking HLF private without help. A falling stock price hurts his chances of getting someone to help him take HLF private.

It is clear that Carl does not want to own HLF on his own....
Bulls and bears make money and pigs get slaughtered.
Why is carl icahn buying? and not one person has an opinion on how both ichan and ackman can win.
six profile picture
What is interesting is that the path for Icahn to make the most money, is a path that lets Ackman off the hook...
Carl gets to see the HERBALIFE sales numbers every day he knows exactly what's happening that's why he's buying... He would rather squeeze Bill slowly quarter after quarter ... he will keep increasing his stake... the company will buy back shares ...as the squeeze continues.. nothing like Carl to pump a stock
Wez profile picture
"as the squeeze continues"

Typically the price of a stock would be rising to consider it a squeeze...in this case the stock is clearly trending down.
six profile picture

You can now buy a t-shirt commemorating the Ackman vs. Icahn battle...

long squeeze?? seems there are plenty of longs around with hlf to go

plenty of liquidity for carl!
The Whole Truth profile picture
""HLF will meet and/or beat the FTC rules with their millions of satisfied customers.""

Where are these millions of customers?
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