The following is a diversion from typical “Prison Complex” posts, but it certainly falls within Forbes’ wheelhouse. Plus, it’s fascinating. Don’t fret: we’ll be back to dissecting U.S. prison spending soon. — Matt Stroud ——— In case you haven’t been following along, Wall Street hedge fund manager Bill Ackman has been saying very publicly since December that Herbalife, the multi-billion dollar nutritional supplement multi-level marketing company (MLM), is a sham. Ackman is so convinced of Herbalife’s fraudulence that he’s placed a billion-dollar Wall Street bet that the company’s dishonest business practices will eventually kill it. To bolster his public outrage, Ackman has repeatedly invited the U.S. Federal Trade Commission to conduct an investigation into the company’s inner workings. He’s not alone on that front. California congresswoman Linda Sanchez made a similar call recently. New York City Councilwoman Julissa Ferreras did the same. So did the National Consumers League in March. And while FTC representatives have said they find the company’s business practices “disturbing” — and rumors continue to swirl about an Herbalife probe — an official investigation has yet to be launched. Ackman, Rep. Sanchez, Ferreras, and others hope that’ll change. But if the U.S.’s historical approach to MLMs is any indication, they may have to wait a long time. The Amway Decision The landmark MLM case in the U.S. occurred way back in 1975. At that time, the FTC went after Amway for many of the same reasons Ackman and others want the FTC to go after Herbalife today. Amway is a Michigan-based multi-level marketing company (MLM). It’s international — one of the first MLMs to become a household name in the US and one of the first to expand successfully abroad. It’s got a vast product line (including home and personal care products, electronics, jewelry, even insurance and dietary supplements) but its business model is indistinguishable from MLMs all over the world: its non-employee distributors are paid small commissions to sell products and recruit as many new distributors as possible. While the eventual ruling in the 1979 Amway case didn’t make Amway look very good, it also shielded other MLMs from prosecution. As the FTC saw it, Amway had two main problems. First, its distributors weren’t really selling anything. Amway’s distributors would receive a percentage of what they sold, a bonus percentage for what their recruits sold, another bonus percentage of what their recruits’ recruits sold, and so on. But they could only maximize and maintain those percentages by remaining “active” — by selling a certain amount of product every month. So they took the easy way out: instead of selling products, distributors would just buy the minimum number of products every month and stash it somewhere. Second, Amway made unprovable claims about distributors’ income. The FTC decision — a 121-page document that describes years of arguments and questions about Amway’s sales practices — walks readers through a litany of Amway-approved pitch lines: “What are some of your dreams?” “Do you want a new car, a new house, college …read more
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