Bill would allow pyramid schemes to keep preying on consumers

Currently pending before the House Energy and Commerce Committee, H.R. 5230 is a bill aimed at overturning 40 years of case law that clearly identifies what constitutes a pyramid scheme and serves to protect consumers from such predatory practices. The bill is backed by the Direct Selling Association, which includes members such as Herbalife, whose business model depends on some form of pyramid scheme to exist.

Critically, H.R. 5230 would eliminate anti-pyramid safeguards that require companies to ensure sales by distributors are made primarily to customers outside the distribution network. Instead, it gives multi-level marketing organizations (MLMs) permission to engage in purchasing and recruiting behaviors that the courts have identified as illegal pyramid schemes. Such changes blur the lines between multi-level marketing organizations (MLMs)– which are legal– and pyramid schemes– which are not.

The changes provided for in this bill would permit a new wave of pyramid schemes and result in significant harm to consumers. Consumers will be deceived into participating in programs that have no chance of success. In essence, individuals will be coerced into committing significant dollars into a business opportunity whose only real purpose is to fund those above them in the pyramid.  By way of example, up to 88 percent of the individuals who became distributor’s in Herbalife’s pyramid scheme failed to make any money, and in fact, most lost their entire investment.  At the same time, Herbalife reported record profits.

Under the present state of the law, the Federal Trade Commission (FTC) is able to pursue such fraudulent conduct. With regard to Herbalife, the FTC recently investigated and found its business model to be a pyramid scheme.  It then negotiated a settlement with Herbalife which required significant changes to Herbalife’s business model and the payment of 200 million dollars in damages to consumers. Unfortunately, such would not have been possible if H.R. 5230 was current law.  If passed, the law would eliminate the prosecution of all but the most blatant forms of pyramid schemes.  Most companies would be able to craft pyramid schemes which use the MLM business model as cover, and the consumers would suffer.

In the United States, Latinos are twice as likely to own a business than non-Latinos. The entrepreneurial spirit is an ingrained part of the Latino culture. But with such an enthusiasm for business comes risk.  LULAC is particularly concerned that Latino entrepreneurs are susceptible to falling for the next great pyramid scheme.  Our concern is grounded in past experience. For example, in 2013, 60 percent of Herbalife’s 525,000 total U.S. distributors were Latinos, and most of them lost money.   LULAC will work together with our nation’s consumer protection advocates to fight against this bill. Any new legislation involving pyramid schemes needs to ensure that those who invest in a company and are willing to work hard have a real opportunity to become a successful entrepreneur.

Wilkes is the executive director of the League of United Latin American Citizens, which advocates for the political, economic and educational rights of Hispanic Americas. Follow him on Twitter @BrentWilkes. Follow LULAC on Twitter @LULAC

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