In the age of the internet, companies have to constantly worry about angry consumers telling the world their troubles. I'm thrilled that the internet has given consumers a voice. Previously, companies could do as they wished with their customers, and the chances of anyone finding out were slim. Now that's not the case as blogging is a tool available to anyone with access to a computer.

Companies need to be more careful in how they deal with customers, especially if their customers have a very large platform from which to shout about their experiences. Imagine what happens when a Washington Times columnist gets cheated by multi-level marketing company Pre-Paid Legal....

Kate Tsubata had a Pre-Paid Legal membership at one time, but quickly canceled it when she and her husband realized it didn't cover any of the things they needed and believed were covered. 20 months after canceling their membership, they realized that they had been charged $12.95 a month for a Pre-Paid Legal service they didn't sign up for.

I've been studying multi-level marketing for several years, and Robert FitzPatrick has been studying the industry even longer. He's been qualified as an expert witness in MLMs and knows a whole lot about the industry. He recently released a report on 11 large MLMs which demonstrates that a full 99% of participants lose money.

I've believed for a long time that any business venture which boasts 99% failure rate is one to avoid. Quite predictably, the supporters of multi-level marketing plans exclaim that those who don't succeed (i.e. turn a profit) have not worked hard enough or have not done the right things. Really? Could it really be that all 99% of the participants in MLMs are lazy losers who don't try hard enough? I seriously doubt it.

Sure, any business venture carries risk along with it. But FitzPatrick wrote recently on his blog that multi-level marketing is systematically flawed, and I agree with him. There's no such thing as a "good" MLM. People will suggest you "just haven't found the right one." Yeah. Ask the people who are on their eighth or ninth MLM and still haven't made any money.

Yesterday California's Attorney General, Edmund G. Brown Jr., announced a lawsuit against YourTravelBiz.com (YTB) for being a "gigantic pyramid scheme." He says that the multi-level marketing company recruited tens of thousands of members with false earnings claims.

YTB was supposed to a business through which members could operate online travel agencies. In reality, it was nothing more than a pyramid scheme meant to make those at the top rich, while thousands of people below them lost a lot of money. The operation is accused of being a pyramid scheme because the members were paid for recruiting new members, regardless of whether they sold any travel services.

Members pay $450 to join the scheme, and a monthly fee of $50 to stay active. In 2007, it is alleged that there were over 200,000 members, and that only 38% of them made any money from selling travel services. The median income for those making commission on travel services was only $39. (You read that correctly... not even enough made all year to pay for one month of fees!)

If you're like over 90% of the people who get involved in multi-level marketing, you're going to lose money. The sad thing is that most people get involved in MLMs because they want to make money.

Below is the story of one college student who lost thousands in an MLM. These companies are known for preying on some groups of people who can least afford to lose money: college students, stay-at-home moms, single parents, people looking for some extra income to pay down debt.

Why are these ventures so expensive? They often involve the purchase of expensive inventory, lots of "business tools", attendance at expensive seminars, and all sorts of small costs that add up quickly. Sure, I've heard the phrase that you can't make money unless you spend money. The problem is that the chance of actually making any money in MLM is very, very slim.



And don't forget the most attractive part of multi-level marketing: Trying to recruit friends and family. Most people are wise to the "come and listen to a great presentation about a fantastic opportunity" line. The only opportunity you're really giving them is a chance to lose money. Spare them and yourself the agony!

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

Over on BloggingStocks, I've written about Barry Minkow's allegations of fraud at multi-level marketing giant Herbalife.

Here on WalletPop, I thought it might be worth taking a look at Herbalife -- especially its recruiting tactics -- from the personal finance perspective.

On the Herbalife webpage, there's a form you can fill out to receive more information about becoming an Herbalife distributor. Among the questions:

How much would you like to earn monthly?
An extra $500
An extra $1,000
An extra $2,000
The sky's the limit!

PrePaid Legal Services and companies like it sell plans that are billed as "legal insurance." These plans supposedly help the average consumer received "free" legal services in many cases, and discounted services in other cases. They're often marketed as offering help to the "little guy" who might otherwise not be able to afford a lawyer.

The truth? These plans offer very little real help to consumers. Many types of cases are excluded under the plans, so you won't be receiving any "free" services related to them. If you do happen to qualify for services, you'll find out quickly that the services are very limited and are mostly only for time spent on trial. Many hours of legal services will be needed prior to the trial, but most of this is excluded from the plans, and plan participants will have to pay out of their pockets for those services.

More details in this video. (Disclosure: I was paid by Fraud Discovery Institute to help research the issues raised in this video.)



Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

On his website totalwellnessnetwork.com, Dr. Ladd McNamara extols the benefits of network marketing: "20% of all millionaires in the world made their fortune through the Network Marketing system," he writes.

But if 20% of the world's millionaires got that way through multi-level marketing, they also apparently go that way through tax evasion. In a paper titled Who Profits from Multi-Level Marketing? Prepares of Utah Tax Returns Have the Answer, Consumer Awareness Institute President Dr. Jon M. Taylor wrote about his interviews with tax preparers about multi-level marketing:

A manager of H&R Block in northern Utah, told me that during his 25 years of doing over 12,000 tax returns a year between he and his group, they could not remember a single client who had reported a significant profit over any appreciable period of time in MLM! ... And a tax software developer, who dealt with thousands of tax preparers across the country, said he had asked about 100 of them if they had ever seen a profit reported from MLM participation. None had. This was out of a total of over a million tax returns ...

Writing on AllBusiness.com, home-based business guru Frank Ross talks about that special group of people that embraces the idea of a recession:

Everyone's talking the "R" word - Recession in the U.S. There is one headed our way, or depending on who you talk to, there's one already here. Most people fear recession, but one group that doesn't fear it is a handful of successful network marketers. In fact, some of them embrace recession.

It's widely-known that tough economic times are a boon to the recruitment numbers for multi-level marketing companies. But as I discussed last month, this doesn't make sense, assuming that network marketing is a bona fide means of distributing goods.

Here's why: With few exceptions, the products sold by multi-level marketing companies are very expensive compared with similar products distributed through traditional retailers. Network marketing and pyramid scheme expert Jon Taylor compared MLM-distributed products with other comparable products and found that products distributed through MLM are about 5 times more expensive, on average.

Here's my question for Mr. Ross: Why on earth would a recession lead to a new found appetite for premium-priced nutritional supplements and other products commonly distributed through MLMs? As I wrote before, the counter-cyclical nature of the industry would seem to indicate that network marketing success is not about selling products on their merits; it's about getting desperate people to buy products they can't afford in the hope of recruiting others to do the same so they can earn commissions. That's why it follows a completely different economic cycle than conventional product sales.

In order for multi-level marketing companies not to qualify as pyramid schemes, you have to believe that people participate to acquire products. Skeptics, including myself and WalletPop's Tracy Coenen, believe that in many cases, the products simply serve as cover for a scheme that is not different from a chain letter in any meaningful way.

The strength of multi-level marketing recruiting efforts in times of economic weakness and uncertainty seem to reinforce my belief that these "business opportunities" are little, and often nothing, more than endless chain recruitment schemes.

In 2002, Entrepreneur columnist Michael L. Sheffield responded to a reader who was worried that her network marketing business would suffer in step with the general economic malaise that was gripping the country at the time:

China doesn't allow Multi-Level Marketing (MLM) schemes or pyramid schemes, period. The government allows single level direct sales if a company has a proper license. But no recruiting is allowed and no multi-level structure is allowed.

While we often think of China as being behind the times compared to the United States, those of us who study the ill effects of MLM wish that our government took such a hard line against this abusive business structure. Despite the laws against MLMs in China, there are people and organizations who do businesses there anyway. Companies have discovered that it is impossible to make money with the single level selling that the government allows, but that the MLM structure thrives with over a billion people available to be recruited. Usana Health Sciences and Herbalife are just two MLMs that have been found doing business illegally in China by undercover investigators.

And now a promoter of an Ant Farm pyramid has left thousands of Chinese consumers penniless. Liaoning province is fast becoming the hub for illegal pyramid schemes and illegal MLM activities in China. It was there that the Yilishen Tianxi Group offered an "opportunity" to purchase a box of ants for the equivalent of U.S.$1,375.

Despite the claims of many who are trying to recruit new victims into their Multi-Level Marketing (MLM) scheme, you are not going to find riches there. While there are often lofty claims about many millionaires originating in MLMs or a high percentage of women making six-figure incomes from MLMs... the reality is that the people profiting from MLMs are few and far between.

Have you ever asked someone pushing an MLM for support of their claims? Have you ever seen documentation that proved there were many making executive incomes? Have the MLMs ever voluntarily offered up statistics about the success and failure of distributors?

I can almost guarantee that your answer is "no." Why is that? MLMs don't release figures related to the number of participants involved during the year, the failure rates of participants, or even the success rates of participants because they're beyond dismal.

Hundreds of thousands of Americans get sucked into Multi-Level Marketing (MLM) companies each year. From Mary Kay to Amway to Herbalife to PrePaid Legal, the list is seemingly endless. Each offers its own special spin on the products it sells, but the main focus of an MLM is on recruiting new members.

MLMs live and die by the recruitment of new members, who make the bulk of the product purchases from the company. Little of the product is resold to an actual end user, but the MLM company doesn't care. The sale has been made to the distributor (or associate or representative or member or consultant or whatever term you like).

It's widely knows that those in MLMs make little money. In fact, almost everyone in the pyramid loses money. The real money makers in the scheme are those who own the MLM company. So in the spirit of giving, I'm offering you ten simple steps toward creating your very own MLM. Start yours now and cash in on all those people who are dying to hear about your "opportunity"!

1. Come up with a product or service that you can make sound revolutionary. Funky berry juice, groundbreaking face cream, or unusual financial services will be fine. The only caveat is that you must be able to make it sound like something that's never been done quite this way before. This adds to the mystique.

2. Create a commission structure (also called pay plan, incentives, or rebates) that is difficult to understand, and that pays about 8 to 10 people in an upline as soon as an associate buys something from the company. Ultimately, those in higher levels in the company reap all the rewards, and this is ideal, because it gets everyone on the bottom excited about the "possibilities" and they will recruit their little hearts out.

One of the credibility-building factors that modern multi-level marketing (MLM) companies rely on is the assertion that they're legal. Often, it's said that if a company wasn't following the laws, they would have bee shut down by now.

Those things do sound credible. Average consumers assume that the government cracks down on businesses that are breaking the law. But the sad fact is that the FTC, the organization in charge of regulating MLMs and pyramid schemes, has chosen not to act against almost all MLMs.

Only a select few MLMs and pyramid schemes are targeted by the FTC. The rest are allowed to exist and operate as they please.

The key to avoiding being labeled a "pyramid scheme" by a government agency is having a "product" (or service) upon which your scheme is based. Traditional pyramid schemes only involve an exchange of money between people. MLMs skirt this by including a product in the mix – people are supposedly exchanging money for a product.

The holiday season is a time for family... a time for friends... a time for conversation... a time for you to get roped into a "special opportunity."

Did Uncle Bill ever approach you at a gathering of family and friends to tell you he wanted to share an opportunity with you? Or did he walk up to you and say that he had just started his own business? (And you were probably dumbfounded because you couldn't think of any type of business that Uncle Bill was qualified to run.) What about an invitation to come hear a great motivational speaker? Or an invite to a meeting, the substance of which Uncle Bill wouldn't tell you... but he would say that you would be really interested?

All of these are typical come-ons when someone has become involved in a multi-level marketing scheme. They go by different names – MLM, network marketing, dual marketing, direct selling, binary plans, and many others. They'll tell you "this company is different," but it's really not.