Falsely wrapped in the imagery and rhetoric of legitimate commerce, politically protected by a captured Federal Trade Commission and financially supported by Wall Street speculators, the terrible realities of “multi-level marketing” can remain hidden even when in plain sight. Yet, when displayed – in extreme – as in the latest MLM atrocity called “NXIVM”, MLM’s inherent fraudulence and the brutal consequences suddenly become clear.
NXIVM became a high profile criminal prosecution popularly described as a sex slavery racket involving celebrity and mega-rich supporters and the horrific branding of the flesh of some of the female victims. The leader is depicted as a sex-addicted monster with unearthly powers to bring others under his control. Occasionally the fraud is described, without details, as “multi-level marketing” or a “pyramid scheme” selling some sort of seminars that promised some type of self-improvement.
Now, a 189-page lawsuit has been filed on behalf of eighty victims of NXIVM that goes deeper and shines a brilliant light on NXIVM’s financial operation and the particular way it empowered the leader to gain cult-powers over victims who were reduced to what it calls “peonage.”
Peonage is both an historical and legal term, defined by Encyclopedia Britannica as “involuntary servitude.” The term traces to the Spanish conquest of Mexico, where the native people were forced to work for Spanish planters and mine operators. In the USA the term refers to workers “compelled by contract to pay their creditors with their work.” Its practice was concentrated in former slave-holder states where “employers could induce or deceive men into signing contracts for labor to pay their debts or to avoid fines that might be imposed by the courts.” Peonage is a form of slavery. MLMs, as shown in the NXIVM lawsuit, compel labor without pay and gain personal and social control over many followers in order to defraud them.
How was it possible for NXIVM to reduce educated, even affluent people to a slave-like status in which, like physically enslaved people, they were actually branded as property of their “owner”? The court case traces this dangerous power to a particular form of fraud that is definitive and unique to the “MLM” industry.” In this largely unstudied realm of so-called business, victim responses are universally observed that are eerily similar to those manifested by NXIVM’s, though less physically brutal.
From Pyramid to Peonage
NXIVM’s power was based, as is that of all MLMs, in the toxic interplay of the “endless chain” or pyramid-scheme proposition and cultic persuasion methods. An insular fantasy world is created in which wealth and happiness are believed to be dispensed by prophet-like leaders in a unique income scheme that exists nowhere else in world of commerce. Not only did NXIVM describe itself as “MLM” but its founder, as the lawsuit notes, was a notorious veteran of the “industry.” It reminds the court:
Before (NXIVM)… (the leaders) ran another pyramid scheme called Consumers Buyline Inc. (“CBI”) that was investigated by 25 state attorneys general and eventually shut down by New York’s Attorney General Robert Abramson September3,1996.”
The “endless chain” swindle had been long understood as criminal fraud until, under political pressure, the Federal Trade Commission effectively legalized it in 1979. Under ongoing pressure, the FTC has protected endless chain schemes as “legitimate” when they call themselves “multi-level marketing” as NXIVM did. Today, even when they are occasionally prosecuted, endless chain frauds identified as “MLM” are treated only as civil offenses, “unfair and deceptive” business practice, even when they cause losses to millions of people and devastate the lives of thousands. These civil prosecutions lead only to inconsistent restrictions and largely harmless fines. Schemes that are shut down only spawn new, identical schemes.
Allowed to offer a perpetual reward of “unlimited” income to all and claiming the absurd power to expand to “infinity,” MLM leaders are able to assume guru-like power over people in a manner unseen anywhere else in the legitimate business world. Armed with this magical power, they elevate the promised wealth to utopian states of personal fulfillment and happiness. With priest-like moral authority they declare “failure” – which is inevitable within the fraud – to be an sign of a character-flaw, the dreaded mark of the “loser.”
The ubiquitous MLM phenomenon of undue influence and toxic power over victims, which NXIVM exhibited, is commonly referenced on Social Media with the all-inclusive and derisive term, “bots.” Family and friends of MLM victims report drastic and robot-like personality changes involving facial expression, posture, clothing, the constant repetition of empty aphorisms and obsessive recruiting and proselytizing. Victims profess extreme loyalty and near-worship of MLM leaders. They display a strange resistance to facts or logic, adopt extreme resentment to conventional institutions and government. They predict a triumphant near-term destiny for themselves of wealth, freedom and power. In this deluded state, some will commit financial suicide, quitting jobs, losing homes, destroying credit status and neglecting family. They appear as addicts, shunning doubters, including long-time friends, and demeaning skeptics or even seeking to damage their good names.
This illicit power enables MLM promoters to keep victims in the scheme over time, even as they lose money, friends and dignity. The NXIVM lawsuit describes this captivity:
Quitting was failure and would result in immense shame and humiliation. Further, it could expose the victim to malicious litigation… and would leave the defector shunned… and cut off from the community of friends that had… become his or her entire world… having abandoned their former careers to devote their lives to NXIVM, made it impossible in many cases to simply walk away.
Promising Success, Producing Failure
That the power of NXIVM that was rooted in the hallmark and fraudulent “endless chain” of “multi-level marketing” is further explained in the lawsuit:
Drawing from methods used in pyramid schemes and multilevel marketing, NXIVM induced students to recruit and form their own downstream sales organizations within NXIVM, so that the students might work their way up in the hierarchy, known as the “Stripe Path” (after the colored striped sashes members wore to indicate rank and recruitment achievements), to a level where they could earn commissions and build careers and income for themselves.
“Stripes” are “pins” or ranks, the classic MLM terminology for pyramid levels. The lawsuit also reveals the inexorable consequences of striving to rise in “stripes” on the NXIVM – or any other MLM – pyramid:
… few students ever qualified for commissions… the Defendants continually manipulated the program requirements, expanded the required curriculum… Out of the more than sixteen thousand people who took NXIVM’s courses, fewer than one hundred ever earned any income from NXIVM’s businesses, and fewer than twenty-five received substantial earnings within NXIVM. Most of the earnings were received by the small group collectively known within the organization as the “Inner Circle.”
The level of financial “success” in NXIVM, as reported in the lawsuit, about one-half of one-percent, is the same in almost all MLMs when measured over multiple years as NXIVM was. The “manipulated requirements” the lawsuit refers to are codified in MLM’s unfathomable pay plans. The complex requirements increase with higher ranks, involving ever-rising revenue volume and more complex structure and positions required of the recruitment chain. Changes can occur without notice. Funds allocated to lower-level recruiters that quit in frustration and loss are transferred to those above, concentrating at the peak. Adding to the rigged system, “inner circle” members in most MLMs often begin with downlines already assembled in previous MLMs or they are secretly hand-picked by company owners or kingpins to take coveted top spots.
A pyramid compensation plan, by design, places the majority at the bottom where profit is impossible due to lack of a “downline.” The capacity for those at the end of the chain to replicate the top recruiters is an illusion fueled by false testimony. With realities obscured, the scheme can perpetrate a narrative that “blames” the victims for their own failure, even as it is inevitable and pre-planned.
As the lawsuit explains, by placing the recruits in a state of constant failure and assigning blame to them for their losses, the scheme can induce the victims to invest even more money and time in related programs that promise to redeem them from failure.
“…promoters learn how to recruit new members to pursue ever more elusive goals, while retaining existing members with the belief that they are making progress.”
Most MLMs swindle their victims first by luring them into a pyramid chain disguised as a real sales company, where they will inevitably fail; then lure them again into an affiliate scam of charging even more for access to what is deceptively portrayed as esoteric knowledge of how to succeed. These “success” programs involve mind-training, motivation seminars, coaching, leads systems, emotional rallies and other “transformational” events. NXIVM conflated the two elements – pyramid chain and sophisticated psychological manipulation – into one cultic racket. Its “product”, which served as bait, was not soap, supplements or shakes but the types of courses that most other MLMs offer in tandem with the product-based pyramid. As chronicled in the lawsuit:
NXIVM’s principal business is the sale of personal improvement and professional development training programs through Defendant Executive Success Programs, Inc. (“ESP”) and other entities. However… it was far more than simply a personal improvement program.”
The lawsuit goes to explain how these “personal improvement” courses functioned as “products” that the victims were falsely induced to purchase and then to recruit others to also purchase and recruit in a classic MLM chain disguised as an MLM seminar sales company.
How Could It Happen?
On June 19, 2019, a Federal District Court convicted NXIVM’s founder of sex trafficking and racketeering, finally bringing the nightmare to an end.
How could such a savage, cultic fraud have operated as a legal “business” for as many as 20 years? There had been complaints and investigative news stories about NXIVM for years. The leader of the fraud had a history of operating an MLM, one of the few to have been prosecuted by state regulators and shut down as a pyramid scheme. Whistle-blowers and victims who spoke out were aggressively sued, threatened and vilified by NXIVM as were cult professionals who identified its destructive methods, a red flag of illegality.
Only when news emerged of sex trafficking and the infamous “branding” of women did prosecutors finally move. During all this time, the FTC never took an action against the scheme. The FTC has also never acted against the founder’s predecessor MLM, Consumers’ Buyline. The harm suffered by NXIVM’s victims and the brutal methods used by the scheme and its leader had to reach a level where the term “slavery” moved from metaphorical to horrifically factual.
The most telling factor that explains how such an atrocity could operate with impunity for so long was that NXIVM enjoyed the blanket protection of the Federal Trade Commission provided to all schemes that assume the label, “multi-level marketing.” The cult behavior of NXIVM and its abusive methods of control and brainwashing have been highlighted in the recent criminal prosecution. What was not extensively reported, but is now eloquently described in the lawsuit, is the toxic foundation for cultism in the MLM model:
Count 1: The Individual Defendants conspired to operate and operated a racketeering Enterprise. Through this racketeering Enterprise, they operated a pyramid scheme, physically and psychologically abused people, and engaged in… other criminal acts: (i) mail fraud and wire fraud, bilking Plaintiffs and others out of large sums of money,(ii) forced labor and trafficking in forced labor, and (iii) forced sexual slavery and trafficking in sexual “slaves.”
While the scale of NXIVM’s physically abusive actions are unparalleled in the MLM world, its financial and psychological methods, its tactics for brainwashing, and, most of all, it systematic impoverishing of participants with an endless recruiting chain proposition are utterly typical. MLM’s impossible and deceptive claim to offer income opportunity based on a perpetual recruiting chain opens the door for fantastical claims, utopian promises and the attendant methods of thought-control, domination and manipulation. Popular belief in MLM’s impossible and entrapping system is abetted and encouraged by the FTC’s blanket endorsement of the MLM “model.” Until that is addressed, more “NXIVM’s” will emerge.