Memorandum to President Barack Obama and Members
of Congress Overseeing the Federal Trade Commission and the newly created
Consumer Financial Protection Bureau:

Main Street
A Whistle Blower’s Guide to
Business Opportunity Fraud

How the FTC Ignored and Now Protects It

By Robert L. FitzPatrick, Pres.
Pyramid Scheme Alert
©2010 Robert L. FitzPatrick
1800 Camden Rd. Ste. 107 #101
Charlotte, NC 28203

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Pyramid Scheme Alert
International Association to Expose, Study, and Prevent Pyramid Schemes

1800 Camden Rd.
Ste. 107 #101
Charlotte, NC 28203
Tel. (704)334-2047
Fax (888)334-1944

Date: October 7, 2010
To: President Barack Obama and Appropriate Members of Congress
From: Robert L. FitzPatrick
Re: Main Street Bubble

We recently witnessed shocking revelations of how our Securities & Exchange Commission (SEC) failed America in the regulation and prevention of financial Ponzi schemes on Wall Street.

I urgently bring to your attention a parallel pattern that has prevailed for ten years at the Federal Trade Commission (FTC), a failure to protect Americans from Ponzis and pyramids on Main Street. These Ponzis are spread not as investment plans, loans or credit offerings but as “business opportunity” solicitations that promise extraordinary income potential. They are now the most common form of financial fraud that citizens fall victim to. During this recent period of regulatory immunity, the schemes have collectively and over time inflicted losses on Main Street consumers that dwarf those of Bernard Madoff’s Wall Street investors. The recent Recession has given the schemes additional predatory momentum as millions more people have become unemployed, face foreclosure and are in desperate need of income.

Oversight is immediately needed at the FTC. Additionally, the new Consumer Financial Protection Bureau must include these Main Street schemes in its coverage of “financial products.” The financial products sold to consumers in Main Street Ponzis entail consumers paying fees and related costs, signing a complex and lengthy legal contact, surrendering many legal rights otherwise available to consumers, restrictions on pricing that result in price gouging, and incurring longer term financial and legal liabilities and restrictions. Additionally, as further evidence that these schemes primarily sell a common financial product, not their advertised consumer items, most of them have strict non-compete clauses in their contracts prohibiting the consumers from investing or working with all other schemes of the same type, regardless of the product they offer. The purveyors of these financial products are, therefore, a clearly identifiable business sector.

The sales of “business opportunities,” are most frequently disguised as “direct selling” and referred to as “multi-level marketing” (MLM), “home-based” sales, network marketing or pyramid selling schemes. They are egregious violations of Section 5 of the FTC Act as “unfair and deceptive trade practices.” Yet, in 2001, the FTC virtually stopped investigating and prosecuting – and therefore de facto legalized – these types of scams. Consequently, they have multiplied in number, spread globally and become more aggressive in their solicitations.

For purposes of this report, they will be referenced by the name commonly used by regulators – Biz Op frauds. Collectively, they represent an enormous and highly manipulated financial bubble – billions of dollars invested in worthless or grossly overvalued assets – the Main Street Bubble.

The Main Street Bubble is inflated by hundreds of pyramid selling schemes and a related network of “cash gifting schemes.” Each year it expands with billions in investment dollars and futile hopes, efforts and manipulated dreams of millions of Americans who are lured into them. Like all bubbles, the hoped-for returns are based on the deceptive and deluded projection of endless expansion. And, as in all bubbles, the losers are left with largely worthless assets, lost funds, squandered time and, frequently, more debt. Many people are financially ruined. The overpriced purchases and payments made by participants, along with costly, time-consuming and futile promotional efforts on behalf of the pyramid company, are revealed, in retrospect, to have been motivated by their perceived future value, which had been falsely advertised as “unlimited.”

Wall Street bubbles typically inflate rapidly and then collapse suddenly and totally. They may later re-emerge over a number of years in a new form, shifting in appearance but not substance, from stocks to real estate or some other commodity or from one security to another.

The Main Street Bubble, in contrast, inflates, collapses, and re-inflates continuously, year after year. The majority of the “losers” are cycled out annually and the bubble is sustained with the concurrent recruitment of new investors and those reinvesting. The bubble is maintained and allowed to grow each year under the current protective policies of the Feral Trade Commission. With political protection allowing it to continuously reconstitute, the Main Street Bubble enjoys a permanent bailout. It functions as a constant drain of funds and energy at the Main Street level. Money from 99% of consumer investors (the proverbial last ones in) is systematically transferred to the scheme’s owners and 1% of the promoters, the equivalent to Wall Street’s Ponzi operators and feeder funds.

After years of no regulation, ubiquitous solicitations, publicized “success stories,” and orchestrated lobbying in which pyramid selling schemes are falsely depicted as viable income opportunities for millions of consumers or a unique business sector that produces a disproportionate percentage of millionaires, some consumers and legislators dismiss news of a 99% loss rate among all consumers who join the schemes. Reality clashes jarringly with myth. The scale of government neglect, the scope of the deception and consequent public harm are too much for many people to accept. It is indeed an “uncomfortable truth.” Yet, the truth of these loss rates has been known as statistically verified for many years.

• In the early 1980s former Wisconsin Assistant Attorney General, Bruce Craig, brought fraud charges against Amway, the largest MLM operating in that state. During the case, he obtained and reviewed tax returns of all of Amway’s active distributors in Wisconsin. The losses revealed by the tax returns were shocking even to the prosecutors. The “active” direct distributors constituted the company’s top representatives in income. Yet this group’s tax returns showed an average net income of minus $900. Those earning a net profit were far less than 1% of the total consumer participants. Asst. Attorney General Craig was later interviewed on the 1982 CBS 60 Minutes expose of Amway entitled “Soap and Hope” where the findings were reported.
• In England in 2007, the Department for Business Enterprise and Regulatory Reform charged that Amway is “inherently objectionable” and must be “wound down” (closed down in USA-English). The government claimed that Amway violated England’s Fair Trading Act 1973 among other laws. The Fair Trading Act 1973 addresses “Get rich quick schemes [operating] on the same basis as chain letters…” The government based its action largely on its documented finding that more than 99% of all UK Amway distributors had lost money. This 99% loss rate held true from more than three decades of Amway UK operations and had inflicted financial harm on tens of thousands of UK consumer/investors.
• A huge database of consumers who have lost money as Amway distributors has been compiled by whistle-blower, Eric Scheibeler, author of Merchants of Deception, a book about deception in Amway’s solicitation campaigns. Scheibeler was involved in Amway for nearly a decade and reached the upper level of Amway’s pyramid hierarchy. When he presented direct evidence of deception and massive consumers losses to Amway officials he was driven from the company, vilified and sued. His database now has thousands of verified and documented reports of losses from consumers all over the world, including more than 200 from Australia and, increasingly, many coming in from China.
• The 99% rate is by no means limited to Amway, but rather occurs among all MLM companies that employ Amway’s “endless chain” pay plan and in which few distributors earn profits from retail selling. The pyramid structure, lack of sustainable retail sales and “top loaded” pay plans (the majority of commission – per sale – is transferred to the top of levels of the recruitment chain) guarantee these loss rates. Most MLM companies employ the Amway-type pay plan and fit this description. Pyramid Scheme Alert compiled statistical data on commission payouts disclosed by 11 of the largest and better known multi-level marketing companies, including Amway. The data revealed that the 99% loss rate held true for all of them.

Collectively and over time the Main Street Bubble far exceeds Bernard Madoff’s Wall Street fraud in scale of financial harm. An estimated $10 billion per year are lost by US consumers. Worldwide, the figure is far higher, with most losses inflicted by US-based companies.

As in Bernard Madoff’s “hedge fund,” the value of the consumer investments in the “direct selling” schemes depends on the continuous enlargement of an investor base. When Madoff’s bubble suddenly burst most investors realized their losses immediately. But, as prosecutors and whistle blowers revealed, the investments of nearly all were actually lost the day they were placed with Madoff. This is because his investment fund operated as a Ponzi scheme. It was only disguised as a hedge fund. Returns were not generated from profitable trades but from a money transfer of later to earlier investors. Such a money transfer plan dooms most investors by design.