Congress set to make some “illegal pyramid schemes” legal.

Pyramid Scheme Promotion amendment added to Congressional Bill. If passed, could hurt Direct Selling companies, distributors and consumers.

On July 13, 2017, Congressman Moolenaar offered an amendment specific to Direct Selling that was included in the Fiscal Year 2018 Financial Services and General Government Appropriations bill, which is currently pending before the United States House of Representatives.

If passed, this bill could damage many Direct Selling businesses and give an unfair advantage and upper hand to pure internal consumption companies and by default many pyramid schemes as well. Most pyramid schemes have no external customers and rely purely on purchases made by participants in the opportunity. The Moolenaar Amendment could end up protecting many illegal pyramid schemes; in essence the Moolenaar Amendment could help make many illegal pyramid schemes legal.

The Moolenaar Amendment could hurt many Direct Selling companies (especially those who are truly customer-driven), negatively impact existing distributor commissions and harm consumers. In fact, the Direct Selling profession could end up being overrun by purely “recruiting-based” companies and pyramid schemes, which would harm customer-driven Direct Selling companies. This increase in “non-customer driven” companies could lead to a decline in the number of customer-driven Direct Selling companies—which, in the worst case scenario, might jeopardize the existence of the Direct Selling channel, and in the best case scenario slow down the current positive and healthy trend towards more Direct Selling companies adopting a “customer-based” business model.

The Moolenaar Amendment could lead to a decline in the number of “customer-driven” Direct Selling companies — which could jeopardize the future of the Direct Selling channel.

Many Direct Selling companies, leaders and advocates strongly oppose the current version of the Moolenaar Amendment. Consumer groups have also called on the House to oppose the Moolenaar pyramid scheme promotion amendment. (To view National Consumer League opposition, click here)

ACTION STEP: Urge Speaker Paul Ryan (R-WI) and Minority Leader Nancy Pelosi (D-CA) to remove the Moolenaar Amendment from the financial services appropriations bill when it comes to the House floor for a vote. The Mooenaar Amendment is incomplete the way it is currently written; it must address and include retail customer (non-distributor) verbiage. Also, use hashtags #MoolenaarAmendment and #HR3409

July 18, 2017

The Honorable Paul Ryan
Office of the Speaker
United States House of Representatives
H-232, The Capitol
Washington, D.C. 20515

The Honorable Nancy Pelosi
Office of the Democratic Leader
United States House of Representatives
H-204, The Capitol
Washington, DC 20515

RE: Consumer groups’ opposition to Moolenaar amendment to the Financial Services appropriations bill

Dear Speaker Ryan and Leader Pelosi,

The undersigned consumer organizations wish to express our strong opposition to an amendment offered by Congressman Moolenaar that was included in the Fiscal Year 2018 Financial Services and General Government Appropriations bill, which is currently pending before the House. This amendment, based on the “Anti Pyramid Scheme Promotion Act of 2016 (HR5230),” (ii) would rob the Federal Trade Commission (“FTC”) of its ability to protect consumers from all but the most egregiously fraudulent pyramid schemes.

This amendment would rob the Federal Trade Commission of its ability to protect consumers from all but the most egregiously fraudulent pyramid schemes.

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. (iii)
• 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.

Since 2013 the FTC used its enforcement authority to successfully prosecute MLM companies BurnLounge,(iv) Fortune Hi-Tech Marketing, (v) and Vemma,(vi) as pyramid schemes. The FTC also imposed significant business changes and a seven-year reporting requirement on, Herbalife, one of the largest MLM companies operating in the US.(vii) It is difficult to imagine any of these actions occurring under the terms of the Moolenaar amendment.

The ability of the FTC to prosecute fraudulent or deceptive pyramid schemes posing as legitimate multi-level marketing business opportunities is crucial to the Commission’s ability to protect the ability of consumers to have trust in the direct selling industry.

The ability of the FTC to prosecute fraudulent or deceptive pyramid schemes posing as legitimate multi-level marketing business opportunities is crucial.

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.

Given these serious concerns, the undersigned organizations urge you to support the removal of this language from the appropriations bill when it is considered on the House floor.

Sincerely,

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, The College of New Jersey School of Business
Peter J. Vander Nat, PhD, Senior Economist (retired), Federal Trade Commission

cc: Members of the United States House of Representatives
To view the original full letter, click here.

Related:

• Letter sent to members of the US House of Representatives: Click to read.
• Consumer groups call on House to oppose pyramid scheme promotion amendment: Click to read.
• DSA President’s opinion piece on The Hill; completely ignores lack of emphasis on customers in Moolenaar Amendment. Click to read.
• FTC Commissioner Terrell McSweeny: “Congress should crack down on predatory ‘pyramid schemes,’ not look away.” Click to read.
• “What the FTC requires of MLMs is simple: make truthful representations and be built on real sales to real people.” — @TMcSweenyFTC
• The Hill: Pyramid schemes want immunity from the feds — here’s why. Click to read
• DSA: Currently no statutory definition of a Pyramid Scheme exists in federal law. Click to read. Yet neither Moolenaar Amendment nor HR3409 make adequate distinction between pyramid schemes and pure internal consumption companies by not addressing “real sales to real customers” as part of the definition. Not good enough.
• The Moolenaar Amendment: Why is the DSA pushing pro-pyramid law? Click to read. “There is no distinction between a pyramid scheme and an MLM company without retail sales taking place and generating commissionable revenue. Just imagine, MLM companies operating with little to no retail sales activity with full impunity from the law. That’s a disgraceful enough proposal on its own. That the Direct Selling Association is advocating it? How about the DSA stop soley representing the interests of company owners paying their bills and try representing the best interests of the Direct Selling industry for a change?”

(i) House of Representatives Committee on Appropriations. “Appropriations Committee Approves Fiscal Year 2018 Financial Services Bill,” press release. July 13, 2017. Online: https://appropriations.house.gov/news/documentsingle.aspx?DocumentID=395001

(Rep. Moolenaar — The amendment adds language to define the term “pyramid promotion scheme” and limits funds for enforcement actions outside the definition. The amendment was adopted on a voice vote.)

(ii) Online: https://www.congress.gov/bill/114th-congress/housebill/5230?q=%7B%22search%22%3A%5B%22hr+5230%22%5D%7D&r=1

(iii) Vander Nat, Peter. “Why this anti-pyramid scheme bill is outrageously wrong for consumers,” TruthinAdvertising.com. May 23, 2016. Online: https://www.truthinadvertising.org/why-hr-5230-is-wrong/

(iv) Federal Trade Commission. “FTC returns almost $1.9 million to consumers in BurnLounge pyramid scheme,” press release. June 15, 2015. Online: https://www.ftc.gov/news-events/pressreleases/2015/06/ftc-returnsalmost-19-million-consumers-burnlounge-pyramid-scheme

(v) Federal Trade Commission. “FTC Settlement Bans Pyramid Scheme Operators From Multi-Level Marketing,” press release. May 13, 2014. Online: https://www.ftc.gov/news-events/press-releases/2014/05/ftcsettlement-bans-pyramid-schemeoperators-multi-level

(vi) Federal Trade Commission. “FTC acts to halt Vemma as alleged pyramid scheme,” press release. August 26, 2015. Online: https://www.ftc.gov/news-events/press-releases/2015/08/ftc-acts-halt-vemmaallegedpyramid-scheme

(vii) Federal Trade Commission. “Herbalife Will Restructure Its Multi-level Marketing Operations and Pay $200 Million for Consumer Redress to Settle FTC Charges,” press release. July 15, 2016. Online:
https://www.ftc.gov/news-events/press-releases/2016/07/herbalife-will-restructure-its-multi-levelmarketing-operations