Amendment Tries To Weaken FTC's Ability To Prosecute Pyramid Schemes

MLM scam operators are always working to change the laws here in the USA to protect themselves from regulators.  From the state level to the federal level they are at work.  In a recent attempt, John Moolenaar (R-MI) has slipped in an amendment into the financial services appropriations bill.

Here is a breakdown of what is wrong with this amendment:

A broad coalition of consumer and Hispanic advocacy organizations is calling on the United States House of Representatives to oppose efforts to weaken the Federal Trade Commission’s (FTC) ability to protect consumers from fraudulent pyramid schemes. On Thursday, July 13, 2017 an amendment offered by Congressman John Moolenaar (R-MI) was added to the House Financial Services and General Government Appropriations bill which would eliminate long-standing requirements that direct selling companies establish a viable retail business instead of relying on a churning base of new recruits.

This amendment is problematic for a number of reasons:

  • First, it eliminates the need for direct selling companies to establish their product with a retail customer base other than distributors themselves. It relieves distributors of any responsibility to sell to retail customers, other than those that they recruit to pursue the business opportunity, who in turn recruit others for the purpose. This would relieve direct selling businesses of the need to operate a viable retail business, as opposed to a fraudulent or deceptive recruitment scheme.
  • Second, it allows direct selling companies to profit off a churning base of recruits who are incentivized and often required to continually repurchase product directly from the company in order to qualify for rewards, rather than meeting legitimate retail demand for the product or service on offer.
  • Third, it eliminates anti-pyramiding safeguards established in prior case law to ensure that the direct selling company successfully demonstrates its distributors’ emphasis on legitimate retail customers.
  • Finally, it gives fraudulent or deceptive MLMs permission to engage in purchase and recruiting behaviors that the courts have already identified as endemic to illegal pyramid schemes. Recent actions by the FTC and SEC demonstrate the ongoing risk.

Unfortunately, instead of empowering the FTC to protect consumers, the Moolenaar  amendment would blur the line between legitimate business opportunities and illegal pyramid schemes. The courts have consistently stated that the critical difference between a  legitimate MLM business and a pyramid scheme is that a MLM’s revenues must come  primarily from the sale of products and services to retail customers unaffiliated with the  business opportunity. By contrast, a pyramid scheme generates its revenue primarily from  the recruitment of new members into an endless chain business opportunity. This test has  been upheld by over 40 years of case law. Unfortunately, the Moolenaar amendment would undermine this critical tenet and create numerous carve-outs and exemptions that would prevent the FTC from prosecuting all but the most blatantly fraudulent pyramid schemes.

Signatories on the letter included Consumer Action, Consumers Union, Consumer Federation of America, Consumer Watchdog, League of United Latin American Citizens, National Association of Consumer Advocates, National Consumer Law Center (on behalf of its low income clients), National Consumers League, Public Citizen, U.S. PIRG, William W. Keep, PhD, and Peter J. Vander Nat, ​PhD.

To view the full letter, click here.