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How lobbying dollars prop up pyramid schemes

How lobbying dollars prop up pyramid schemes


As federal regulators investigate Herbalife, a long history of political maneuvering becomes relevant again

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Last month, a front page New York Times investigative report revealed that Bill Ackman, the hedge fund manager crusading against nutritional supplement company Herbalife, had pressured legislators and paid civil rights organizations upwards of $130,000 to start a federal investigation into the company’s business practices.

The New York Times acknowledged that "Herbalife has mobilized its own army of lobbyists to defend itself against Mr. Ackman’s charges." But it didn’t emphasize that Herbalife spent nearly 800 percent more on lobbying in 2013 than Ackman did. It also didn’t mention that Herbalife’s intense lobbying effort last year is part of an influential, decades-old political strategy undertaken by the multi-level marketing (MLM) industry — a group of companies and industry groups like Herbalife that promote so-called "direct sales" businesses, which sell products in tandem with the opportunity to sell products. This political strategy — with ties to dozens of current congressional representatives who have received handsome donations from MLM companies and industry lobbyists — has pushed federal regulators away from investigating these companies. It’s also encouraged federal regulators to avoid defining the explicit difference between a legal MLM and an illegal pyramid scheme.

Only three days after the New York Times’ report, Herbalife announced it was being investigated by the Federal Trade Commission (FTC). But with Herbalife officials now in their third week of closed-door meetings with the FTC — and with the majority opinion in a US Supreme Court ruling expressing last week that unlimited campaign contributions by corporations represent "the most fundamental First Amendment activities" — it’s worth asking how MLMs have influenced federal regulators in the past through political maneuvering, and how that influence might continue.

Business opportunity

Herbalife and the FTC have chatted before. In fact, the clearest and most recent example of Herbalife’s influence — and the broader influence of Herbalife-connected MLM lobbying dollars — is a law that became effective in the spring of 2012. After years of political maneuvering, the principal organization that represents MLMs — the Direct Selling Association (DSA) — succeeded in exempting most MLM distributors from this new law, which was designed with "work-from-home" business-opportunity sellers in mind.

It was called the Business Opportunity Rule. Put forward by the FTC in April 2006 to "protect consumers from bogus business opportunities," the proposed rule would require sellers to hand potential customers a one-page document revealing some seemingly simple facts about what they were up to. Namely: whether the company was involved in any fraud-based lawsuits; the terms of its refund policies; "The total number of purchasers in the past two years and the number of those purchasers seeking a refund or to cancel in that time period;" and a list of references. It would also require some documentation supporting any income claims the seller was making.

The FTC roped in multi-level marketers with scammers.

That last piece was important. It meant that a no-name seller pushing a no-name company couldn’t just say they had discovered some easy method to make millions or "end baldness in the human race" without proving it. But the proposed rule would affect MLMs, too — many of which were well-known companies traded on Wall Street. Distributors working for Herbalife and Amway, for example, would’ve been forced to hand over the same one-page disclosure as the scammy companies promising work-from-home data-entry jobs.

To some, this was perfectly reasonable. Many MLM companies have been accused of over-promising earning potential, and have been the target of class-action lawsuits filed by people who say they’ve been lied to about how much money they can earn. One key case in MLM history revolved, in part, around just this kind of alleged misrepresentation. The case was filed by the FTC against Amway, one of the oldest and largest MLMs in the country, which offers an opportunity for anyone to buy and sell health, beauty, and home care products from home. The FTC’s eventual 121-page final document in that case questions an Amway instruction sheet for encouraging its distributors to insinuate that selling the company’s products could "make your dreams come true."

But to MLMs, the proposed rule was a travesty. Herbalife in particular, which had spent almost nothing on lobbying or campaign contributions in 2002, embarked on a spending spree to coincide with the FTC’s proposed rule. The company gave handsomely to MLM-friendly Republicans, such as Wisconsin Congressman Paul Ryan and Pennsylvania Senator Rick Santorum. Democrats got a taste, too, with New York Congressmen Edolphus Towns, Eliot L. Engel, and Gary Ackerman receiving contributions. By 2008, Herbalife had spent more than $800,000 on lobbying.

Herbalife's lobbying dollars hit a peak in 2008, as the company pushed against the FTC's proposed Business Opportunity Rule. Last year, its lobbying spending hit another high as the company campaigned against Bill Ackman, who placed a billion-dollar Wall Street bet that the company is a pyramid scheme. (OpenSecrets)

The company wasn’t alone. The immense political contributions of Amway’s founders and their families have been well-documented, particularly where Republican politics are concerned (a report in Mother Jones magazine earlier this year referred to them as "The New Kochs"). But Amway specifically flexed its corporate muscle to stop the rule, tripling its lobbying dollars between 2006 and 2007. Avon, another MLM questioned for its business practices and political action, spent about triple the amount it spent on individual congressional campaign contributions in 2008 as it did in the next highest-spending year in its history.

Meanwhile, the industry trade group DSA pushed more than 17,000 people to send form letters to the FTC between 2006 and 2008, raging against the opportunity-killing oppression of a rule that roped MLM distributors in with other suspect work-from-home salespeople.

"Some MLMs do engage in unfair or deceptive acts."

In all, responding to DSA’s push and political contributions from MLM companies, 81 congressmen* — 57 republicans and 24 democrats — wrote multiple letters urging the FTC to change its stance on MLMs in the Business Opportunity Rule. MLM detractors sent 187 comments in favor of the proposal as it was written, but that number was dwarfed by DSA’s political army.

In the end, the FTC decided to modify its rule in favor of MLMs. In a staff report to the FTC, analysts wrote that the rule "would have imposed greater burdens on the MLM industry than other types of business-opportunity sellers without sufficient countervailing benefits to consumers." A footnote to that quote, however, acknowledges "that some MLMs do engage in unfair or deceptive acts or practices, including the operation of pyramid schemes or unsubstantiated earnings claims that cause consumer harm." The proposal finally became law in 2012 — and MLMs got a pass.

Money for nothing

Or did they? In a conversation with The Verge last week, Amy M. Robinson, a senior vice president and chief marketing officer with the DSA, acknowledged that the FTC’s final action was a good thing for MLMs. But it is still worrisome, she says. According to Robinson, some wiggle room for FTC intervention remains in the law as it was passed in 2012. "It is DSA’s view that under the definition in the Rule, most [MLMs] would not be subject to the rule," she says. "It’s not a blanket exemption."

But it’s close enough, says Bruce Craig, a former assistant attorney general in Wisconsin who has litigated several high-profile US pyramid scheme cases. Craig says that MLM lobbying dollars are dangerous — and unfair — because they effectively silence the people who are taken advantage of by companies like Amway and Herbalife. "These are people, by and large, who are mesmerized by how these very rich people get on the stage and claim they’re making millions by selling health shakes," he says. "The people who get taken advantage of are unsophisticated, from a business perspective. They’re not very wealthy. They quit their day job, they max out their credit cards, they contact all their friends and neighbors. This is the basic phenomenon."

"They quit their day job, they max out their credit cards, they contact all their friends and neighbors."

Robert FitzPatrick points out the irony of MLMs being exempted from the Business Opportunity Rule. "How is it possible," asks FitzPatrick, an MLM critic and author of False Profits: Seeking Financial and Spiritual Deliverance in Multi-Level Marketing and Pyramid Schemes, "that the FTC has not even imposed disclosure rules on a network of enterprises that pulls as much as $30 billion a year out of 15 million American households every year with a ‘business opportunity’ proposition?"

The answer comes down to politics, he says. "MLM lives and has always lived on the strength of its lobbying." That should worry anyone like FitzPatrick, who’s hoping the FTC will take major action against Herbalife and MLMs after it concludes its ongoing investigation into Herbalife. Part of the problem is that, until recently, "no money at all was ever spent on lobbying against MLM by anyone," FitzPatrick writes in an email to The Verge. "All the ‘anti-MLM’ advocates came to battle without guns."

That is, until Bill Ackman made his billion-dollar bet that Herbalife was a pyramid scheme in December 2012.

"Ackman changed the equation somewhat and also brought the issue to the attention of Wall Street, where it had been ignored or perhaps merely viewed from an ethics-free perspective," FitzPatrick writes. "However, measured against the lobbying of the MLM industry, [Ackman] is like Edward Snowden versus the NSA / CIA."

"Measured against the lobbying of the MLM industry, [Bill Ackman] is like Edward Snowden versus the NSA / CIA."

According to FitzPatrick, last month’s New York Times piece digging into Ackman’s political maneuvering "pretended that Ackman is somehow wielding undue influence."

That’s an odd way to see things, argues Bill Keep, an MLM expert who's dean of the business school at the College of New Jersey.

"Suppose the worst of what people say about both Ackman and Herbalife are true — Ackman is targeting Herbalife simply for the financial return for his hedge fund, and Herbalife is operating a massive, international pyramid scheme," Keep says. "Which should worry us more?"

Keep continues: "The FTC's decision to open an investigation of Herbalife was non-trivial. Everything is now on the table, from invoking the Business Opportunity Rule, to clarifying any misinterpretation of [federal MLM rules], to charging Herbalife with operating a pyramid scheme."

"Any one of these outcomes will send ripples through the industry," he says. "Though instead of a ripple, the latter would be more like a tsunami."

* The names of these 81 congressmen were provided to The Verge by Douglas Brooks, an outspoken MLM critic and Massachusetts -based lawyer who often represents victims of fraudulent and deceptive MLMs.