You Can't Cheat an Honest Man (28 page)

When a distributor recruits a group of downliners that generates a certain level of sales (approximately $15,000 per month for six months during each year), that distributor becomes a “Direct Distributor” and is then entitled to purchase products directly from Amway.

Direct Distributors receive 3 percent of the personal group Business Volume of the Direct Distributors whom they sponsor. At that level both the sponsoring and the sponsored distributors are in the same performance bonus bracket—25 percent. The extra three percent is meant to cover recruitment and training costs.

Many observers—including federal regulators—have found the Amway system suspiciously complicated. In March 1975, the FTC issued a complaint against Amway that included five separate counts involving anti-competitive and deceptive practices. The Feds also alleged that Amway promoted the “endless chain” element of its pyramid structure as much or more than it promoted the actual sale of goods or services.

The agency noted that the Amway Career Manual for distributors explained how to recruit distributors by appealing to the financial goals of prospects. The Manual then offered specific questions for recruiters to ask. These included:

•
What are some of your dreams? Do you want a new car, a new house, college education for your children?

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Do you want retirement income that will afford you a comfortable standard of living?

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What income do you want six years from now? Are you willing to work hard to get this?

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How much would you like as a continuing income? Would you work for your goal?

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Would you be interested if I could show you a way you can make your dreams come true?

These loaded questions—which are so basic and vague that they beg simplistic answers—are typical of MLM recruitment tactics. The Feds also argued that Amway fixed prices at which products and services could be sold through its network. They cited one of the company’s Rules of Conduct:

No distributor shall sell products sold under the Amway label for less than the specified retail price, when making sales to persons who are not distributors, except where commercial discounts are authorized to be given. No distributor shall give a greater discount than that authorized in the appropriate Amway Product Sales Manual.

The FTC noted that, to enforce this rule, Amway threatened termination of the distributorship to discourage retail price cutting.

Finally, the Feds argued that Amway, even without actual proof of economic failure, was “doomed to failure” and contained an “intolerable potential to deceive.” This all stemmed from the alleged fact that Amway would saturate its markets, leaving distributors unable to sell the detergent and household products.

Amway fought back against the FTC charges. It pointed out that its distributorships were not for sale and sponsoring distributors received no profit from the act of sponsoring. “It is only after the sponsored distributor begins to buy products that the sponsoring distributor will receive income,” the company argued.

To receive a bonus, distributors had to resell at least 70 percent of the products they purchased each month. And the company’s so-called “ten-customer rule” held that distributors could not receive bonuses unless they proved a sale to each of 10 different retail customers during each month.

Amway also pointed out that it had, since its beginning, a policy of buying back any unused marketable products from a distributor whose inventory was not moving or who wished to leave the business. Most illegal pyramids don’t do this.

While Amway admitted that it published a suggested retail price list, it denied fixing prices. It claimed:

[E]ach Amway distributor is an independent businessman who purchases products from Amway for cash. Title to these products actually passes from the company to the distributor under a purchase and sales agreement. Thus...each buyer has latitude in determining what price he will charge for the product....

In June 1978, Administrative Law Judge James Timony ruled on the case—and saw things mostly Amway’s way. Among his findings:

•
In order to recruit an effective sales force, Amway encourages its distributors to sponsor new distributors. This is not, however, a pyramid plan.

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In the Amway system, the incentive to recruit comes from the commission distributors receive on product sales by sponsored distributors in their organizations. But, by several rules, Amway requires that commissions are not paid unless the products are sold to consumers.

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Amway has successfully entered the soap and detergents market because its distributors sell directly to consumers in their homes or businesses, rather than through retail grocery stores.

The Court also found the FTC’s charges that Amway lied about how easy it was to make money unfounded. On this count, It concluded:

There is no doubt that the Amway Sales and Marketing Plan is designed to catch the interest of a prospective recruit by appealing to material interests. ...But the Amway plan also makes clear the idea that work will be involved, and that the material rewards to be gained will depend on the amount and quality of work done.

The judge gave particular attention to the FTC’s allegations that Amway was doomed to failure because it saturated its markets. On this count, he noted:

The preponderance of the evidence in the record does not support the allegation of “saturation.” Amway is not a “modern-day version of the chain letter.” [Its] system does not create the potential for massive deception present in a pyramid distribution scheme.... Unlike the pyramid companies, Amway and its distributors do not make money unless products are sold to consumers.

In short, Amway was exonerated. All it received from the FTC investigation was a small fine for some misleading promotional and advertising statements. The bad publicity took a toll, though. Some former employees sued the company for brainwashing them; the suits gave life to talk that Amway was a quasi-religious cult. Sales, which had been growing steadily for 30 years, plateaued.

In 1986, just as the company was entering another growth spurt, the FTC took another shot. It fined Amway $100,000 for illegally inflating earnings projections. Rather than drag out this administrative action with a legal challenge, Amway worked out an agreement with the Feds. It changed its business plan brochures to point out that the average monthly income for active distributors was $65. It also stated in bold type that only one in 82 distributors sold enough products to earn $2,138 a month.

Many people remain skeptical about Amway, though.

In 1996, the company ran into some unexpected trouble. Several record labels sued Amway, charging that motivational videotapes produced by some of its top salespeople were sprinkled with pop songs they’d never received permission to use.

The lawsuit, filed by the Recording Industry Association of America, claimed that top Amway distributors sold the tapes to lower-level recruits through the mail or at sales conventions. And the tapes weren’t cheap, running up to $25 each. The RIAA lawsuit went on to claim that the copyright violations entitled the injured record companies to at least $11 million in damages.

Some of the tapes mentioned in the lawsuit showed top Amway distributors—called “diamonds” in company jargon—enjoying the big homes and flashy cars Amway sales provided.

Aside from catching the record industry’s attention, the tapes bother many regulators. In many cases, the business of promoting the Amway dream is a thriving industry all by itself—and one that more closely resembles an illegal pyramid.

One of the diamonds named in the RIAA lawsuit was Dexter Yager. Yager was a famous character in Amway lore. He came from humble origins, without much formal education, to build a downline network that accounted for as much as a third of Amway’s total sales. (Most people who know Amway readily admit Yager has been as important to the company’s growth as either of its founders. Many people in the business call him the “patron saint of multi-level marketing.”)

From all of this, Yager made tens of millions of dollars a year in bonuses. And he has many of the quirks of a Ponzi perp. He owns a huge home near Charlotte, North Carolina. He has various MercedesBenzes, Rolls-Royces and Jaguars. He boasts about his political connections—having met Ronald Reagan, George Bush and various other pro-business pols.

Of course, Yager is a rarity. He joined a fast-growing MLM firm in its early years. He brought a zeal to selling that would have probably set him apart anywhere. And he has stayed with the venture for most of his working life. In these ways, he is like the investor who bought Microsoft stock at its initial offering. It would be very hard—if not impossible—for a person joining Amway today to replicate Yager’s success.

The nature of the system pushes Yager to spread a different message among the Amway faithful. About once a week, at meetings all over North America, he offers motivational speeches to distributors. The talks often run two hours or longer—and have a spontaneous feeling, even if they’re well-practiced. He’s stoking the fires of his downline troops.

Like many Ponzi perps, Yager makes a big deal about having the courage to dream. He walks his audiences through dream homes; he tells them to dream about owning fancy cars, big boats and personal jets. “I help [downliners] dream,” he says. “Most people don’t dream enough.”

Dexter Yager presses the line of legitimacy that Amway has fought hard to establish. While critics question what they call his “lottery mentality,” Yager is not a Ponzi perp. He has the legally-tested Amway guidelines as a frame of reference.

Not all MLM promoters do.

CHAPTER 15
Chapter 15: Faith, Religion and New Age Gurus

Multi-level marketing programs and pyramid schemes use the rhetoric and psychology of religious evangelism to recruit and motivate distributors. They do this because many people confuse the
faith
they feel in religious contexts with
trust
of people or institutions.

Some Ponzi perps decide that the rhetoric and psychology isn’t enough. They use religion and spirituality explicitly to fleece investors.

Con men using religion as their pitch are nothing new. They trace back, through the novel
Elmer Gantry
, to the time of Christ (who was infuriated by money changers in the Temple)...and even beyond that. But the same social and technology issues that make the 1990s a high time for Ponzi schemes encourage
religious
Ponzi schemes.

The Ponzi Scheme Church of Hakeem

Few religious Ponzi perps can match Hakeem Abdul Rasheed for incorrigibility and sheer gall. Rasheed founded the Church of Hakeem in Oakland, California, as a non-profit religious corporation in March 1977. The Church obtained a tax-exempt status under Internal Revenue Code Section 501(c)(3).

In December 1977, Rasheed held a meeting with about 10 members of the Church and announced the creation of a program he called the “Blessing Plan Covenant.” Participation in the Plan was open to anyone who paid a one-time enrollment fee of $25. Upon becoming a member, a person could then make “donations” to the Church— and receive a 400 percent investment return as a “blessing” or dividend.
Rasheed said that the goal of the Plan was to create 10,000 millionaires. He was looking for people who had faith and wanted wealth. In January 1978, a month after his announcement, Rasheed renamed the Plan the “Dare-to-be-Rich Program.”

The principal method by which Rasheed promoted the Dare-to-beRich Program was a series of “Celebrations.” These were meetings conducted personally by Rasheed. At the Celebrations, Rasheed described the Program: become a member of the Church; invest in the Dare-to-be-Rich Program; receive a 400 percent return on investment within a prescribed time period; and become one of the Church’s10,000 millionaires. Rasheed said that the 400 percent return on investment was possible because the Church had “national and international” investments, which generated “tremendous profits” that the Church chose to make available to investing members.

As the membership grew, Rasheed relied increasingly on a small group of staff personnel to solicit the general public by restating the elements of the scheme. By July 1979, the Dare-to-be-Rich Program had grown so large that it required an organized staff which was formally instructed on how to promote the Program.

Rasheed was a big believer in direct mail. The Church printed and mailed recruitment brochures to a wide cross-section of the public. Internally, these brochures were known as “Calendars.” They invited the general public to attend Church Celebrations and contained— among other things—the following statement:

You Can Turn: $25 into $100 in 70 days, $250 into $1,000 in 90 days, $25,000 into $1,000,000 in 9 months. The Church of Hakeem, Inc. is an international as well as national church function. International and national investments return “Profits” which the church does not choose to keep. So it distributes its “Profits” to its active ministers only. These “Profits” we call an “Increase of God.”

The Church also printed and distributed tickets for free entry to Celebrations, which contained promotional statements of the wealth to be gained through investment in the Dare-to-be-Rich Program. In fact, Rasheed followed Carlo Ponzi’s steps carefully. He paid big profits to early investors with money invested by later ones. He counted on word of mouth to promote his scheme in Black communities throughout the Bay Area. Within a few months, the money was coming in faster than the Church could count it.

The scheme only lasted a year—but it was a busy year. During November and December 1978, the Church collected at least $3.6 million through the Dare-to-be-Rich Program. Rasheed poured money into a number of questionable investments, including a Church-related private school, a yacht and Rolls-Royces. He didn’t invest in any for-profit businesses, national or international.