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Tuesday, April 14, 2009

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JMT

The acid test of the commitment of David Vladeck, new Director of the Bureau of Consumer Protection for the FTC, to real consumer protection will be his ability and willingness to stand up to the Direct Selling Association (DSA), which has been taken over by MLMs (multi-level marketing companies, or endless chain entrepreneuring schemes – a.k.a., product-based pyramid schemes). The DSA has wielded enormous influence over the FTC during the Bush years, with Amway having been one of Bush’s top supporters.

It has recently been proven from the financial records of several MLMs that approximately 99% of MLM participants lose money. So to offset this reality and to enhance recruitment success, MLMs routinely misrepresent actual incomes of participants, dropout rates, background of founders, etc. Also, since many MLM recruiters begin with a hard sell of “potions and lotions” with alleged magical healing or anti-aging properties, misrepresentations of products and services has become endemic to MLM success. Recruits commit to ongoing purchases in order to qualify for hoped for financial rewards and a lifetime of super health.

During the Bush administration, top officials friendly to the MLM industry were appointed, and key officials who had the skills to unravel the deceptions practiced by MLMs were transferred out of consumer protection. Action against product-based pyramid schemes virtually ground to a halt. The DSA/MLM cartel has been allowed to defraud millions of consumers worldwide out of tens of billions of dollars in the aggregate.

The FTC had proposed a Business Opportunity Rule in 2006 that would have included a “cooling off” period before investing in a “business opportunity’ program and required disclosure of meaningful information, such as average income of participants, cancellation and refund statistics – similar to what is required by franchisors, but in much greater detail. The one supplied by MLMs could easily have been printed by the MLM company on a single sheet of paper to be handed out to prospects.

But such disclosure could hurt recruitment. Who would join a program if they knew their chances of profiting were close to zero – with the exception of the founders and those at or near the top of their respective pyramid of participants? The DSA sprung into defensive action, providing form letters for millions of participants who hoped some day to realize a profit from their schemes. Approximately 17,000 persons wrote to object to including MLM in the Proposed Rule, as it would be “too great a burden” for them to generate and supply the information. The DSA then cashed in its extensive political capital (political donations and implied votes) by getting about 80 Congressmen to sign onto a letter insisting that MLM be excluded from the Rule. Last year, the FTC caved and proposed a Revised Rule exempting MLM.

All informed independent consumer advocates were appalled at the corrupt maneuvering underlying this exemption. If there was ever a business model that begs for meaningful disclosure, it is MLM. In fact, the very mission of the FTC to protect consumers against unfair and deceptive practices is at stake. Jon Liebowitz and his new director of the Bureau of Consumer Protection, David Vladeck, will have to choose between protecting consumers and protecting the DSA/MLM cartel.

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