Analysis: Amway Accused of Fraud; Pays $150 Million; Where’s the FTC and DOJ?

Posted on Nov 11, 2010 in Legal, MLM, News, PSA in the Media, Pyramid Schemes, Scheme Alerts

Amway is the largest, oldest and best known representative of “multi-level marketing” (MLM). It is the most prominent member of the Direct Selling Association.

This icon of “direct selling” just announced that it has agreed to pay restitution to consumers and reform costs estimated at over $150 million. The payments are in response to consumer accusations that Amway/Quitar is operating an illegal pyramid scheme. The settlement is the largest in MLM history.

Three Directors and Advisory Board members of Pyramid Scheme Alert served individually as experts or consultants in this historic class action case against Amway. The suit was filed by the law firm of Boies, Schiller & Flexner.

The size of the settlement astonished some observers and the news is spreading fast. It was reported on the front page of the USATodayAmway11.05.10. About $55 million of the total is in actual cash and products as restitution for victims and legal fees. Other elements of the settlement include substantial price reductions to make retail sales feasible, and major changes in the infamous “tools” business that will require Amway to take greater responsibility. These schemes are run by some of Amway’s top recruiters and have been allowed to function as arm’s length, rogue operations, though highly beneficial to Amway.

The huge settlement throws open to question the validity of Direct Selling Association’s “Code of Ethics” and the legitimacy of all other multi-level marketing companies as viable “business opportunities.,” based on the Amway model.

Among the accusations made in the Amway class action suit that resulted in Amway’s agreement to pay $150 million (the suit was technically brought against Quixtar, the now defunct name used by Amway for its North American operations):

* Amway is an illegal pyramid scheme.
* Amway’s Kingpin companies that sell “motivation and training” products to recruits are also an illegal pyramid scheme.
* Amway criminally violates federal racketeering law.
* Amway violates California’s “endless chain” law.
* Amway masks “criminal behavior” with claims that it is in compliance with a federal Amway ruling of more than 25 years ago. In fact, Amway is not in compliance with the ruling.
* Amway induces salespeople to buy thousands of dollars of overpriced products and useless “success tools” and then to recruit others to do the same in an endless chain scheme that dooms, by design, nearly all to losses.
* Amway deliberately deceives consumers to enroll in the pyramid scheme in which they inevitably suffer financial loss.
* Amway’s arbitration rule which is intended to prevent victim lawsuits against it is unfair and “unconscionable”.
* Amway commits wire fraud and mail fraud.

The 99% Factor

A key aspect of the suit is the charge that Amway misleads consumers with false income claims and promises for its “business opportunity.” Pyramid Scheme Alert’s analysis of Amway payouts to distributors shows that more than 99% of all who sign up never earn a profit. When actual costs are factored, including the related “tools” business, some estimates put the loss rates at 99.9%. This 99% loss figure correlates with tax data gathered as early as the 1980s when the state of Wisconsin prosecuted Amway. It was also verified by data gained by federal regulators in England who sued to shut down Amway in that country just several years ago.

Under terms of the settlement, Amway will be restating its “income disclosure” to reflect that the figure offered to consumers is a “gross income” not net, meaning that it is not profit and does not reflect costs that consumers incur when they pursue the scheme.  (It should be noted that Amway’s advertised “average income” is also a “mean”, not a median, average, so it factors the high incomes of the few at the peak of the pyramid, skewing the “average” upward. Such a skewed “average” can also mislead consumers to think that the “average” participant actually earns a profit, masking the reality that the vast majority earn no commissions at all or no net profit.)

Muzzled Regulators

Amway has concealed or obscured these devastating losses to consumers, totaling in the billions over time, with elaborate diversions and rationalizations. But, its most effective weapon of mass deception has been its ability to influence politicians who in turn muzzle regulators.

The lack of government prosecutions, along with sophisticated PR spin and misleading income data have given MLM schemes an aura of legitimacy, heightening their ability to fool consumers and the media as well. Gradually, though, the truth about how MLMs have escaped regulation is coming to light. The answer is plain and simple: MLMs bought influence in Washington and in some state legislatures with campaign contributions and high pressure lobbying.

Amway is ranked as #68 in the 75 top corporate sponsors of Washington politicians, according to the investigative news magazine, Mother Jones. It ranks ahead of food giant Archer Daniels Midland, pharmaceutical behemoth Bristol Myers Squibb and just behind in ranking of Wal-mart, General Motors and oil magnate, Koch  Industries.

For a full report on how Amway and the multi-level marketing industry have so far escaped law enforcement, send for the free report, the Main Street Bubble. Just put the words, “Main Street Bubble” in your email’s subject area.

Admission of Guilt?

Even though the settlement states that Amway admits no wrongdoing, the fact that Amway agreed to pay accusers and incur other remedial costs up to $150 million and chose not to allow the case to go to trial will be read by many people as compelling evidence of guilt. A settlement of this size can hardly be written off as cheaper than legal defense. In fact, Amway incurred huge legal costs and held up the settlement for three years by arguing not that the accusations were untrue but that the victims had no legal right to bring a suit. When the right to sue was established in court, Amway paid up.

Obvious questions are raised by the suit and the settlement

* Will the Dept. of Justice now investigate the consumers’ charges that Amway engages in criminal behavior?
* Will the Federal Trade Commission, finally, investigate the consumers’ charge of Amway is operating a pyramid scheme in violation of the Amway ruling of 1979?
* Will the California Attorney General begin to investigate the charges that Amway violates its state anti-pyramid scheme law?

The huge settlement and payments to victims follows other actions againt Amway.  Government regulators in England several years ago sought to close down Amway for defrauding consumers in that country. Criminal charges have also been brought in one state in India against Amway. And Amway is also being sued for deception and fraud in Canada by Canadian consumers.

It is an open question as to how many actions by other governments, consumer lawsuits and evidence of harm are required before the FTC and Dept. of Justice act.

The recently published book, No One Would Listen, by whistle blower, Harry Markopolos, dramatically describes how SEC regulators ignored his alerts and allowed the Bernard Madoff Ponzi scheme to grow to enormous proportions. Their failure to act caused harm to thousands more people, despite his written and detailed warnings, which he brought to the agency five separate times over an eight-year period of investigating the scam. Additionally, the news media such as the Wall Street Journal and Forbes magazine also failed to respond to his evidence which he offered them. Madoff was apparetnly treated as “too big to expose.”

Beyond possible new regulatory investigations of Amway, the lawsuit settlement raises another even larger question about other MLM companies:

How many other MLM companies are operating exactly as Amway does, which led to this huge payment to victims? This question is especially relevant to regulators and other law firms since the standard defense of most multi-level marketing companies is that they are legal because they operate just like Amway!

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