CONTENTS:

Introduction

How The Scam Works

• Starting Out: "If I Work Hard, I'll Make It!"
• "Independent Contractor?"
• The Training Program
• Prospecting
• Failure: It's All Legal!

Fighting Back

• Avoiding The Scam
• Prosecution & Legislation
• Networking
• Links and Resources

Contact Author

Prosecution and Legislation

The laws right now are stacked against you. It's next to impossible to close down a firm behaving as an illegal MLM because illegal MLM-related laws are weak. Those firms will likely continue as they are for years to come. If you're going to sue, consult an attorney about your best course of action. I think it's better to make sure the case is on the books for the next potential victim who researches the firm. Complain using the appropriate channels, and make your voice heard to your legislators.

I. Prosecution. If you've already been burned, here are your recourses as I understand them:

1. Recourse #1: Mediation or Arbitration. If you signed an employment contract with a mediation or arbitration or clause, be sure you understand what those terms mean. Mediation is meant to facilitate the parties simply coming to an agreement and implies no award or judgment. If you want your case on public record for other potential victims to see, choose arbitration. Arbitration implies an award and is meant to be speedy and less costly than a court hearing or trial but may limit your ability to appeal the award (decision). By arbitrating, you may be giving up the right to pursue the matter through the courts. While an attorney is not required, you can assume the broker/dealer will be represented, and there's a chance they've done it all before. Consider legal representation for yourself. Arbitrators are not required to write opinions or provide reasons for their decision. Request an opinion in writing before the hearing date.

More information is on the NASD's site here.

If you didn't sign an employment contract with such a clause, consider #2 or #3 below.

2. Recourse #2: Small Claims. If it's $5000 or less, small claims is a low-cost solution with no need of an attorney. However, you MUST file your claim properly! If you have been classified as an independent contractor and want to take the easier route, you may need to file the suit against your individual district or general manager to avoid the court's being forced to dismiss your case. If you list the firm as your employer, the firm may claim it owes you nothing since you were never its employee. The trick here appears to involve claiming that the manager is your "employer" and you're suing him for fraud. (Remember, he's an independent contractor, which lessens the firm's legal liability.) If you filed Form SS-8 with the IRS and the IRS has determined you to be an employee (though this could a year or more), haggling over your status may be diverted. If you can't wait and still want a judgment against the firm and not just the individual manager (and you should persist against the firm itself if you want other unfortunate souls to have that firm's name available in court records for future reference), you will likely need to prove to the judge that you were an employee. Try to utilize the criteria listed in the "Independent Contractor" section of this site.

3. Recourse #3: Civil Court. For amounts that do not exceed $25,000. You will likely need to pay for the services of an attorney at this point, and few if any that I know of will accept your case on retainer or pro bono (free, for the public good). You will usually need to come up with a hefty sum ($15-20,000 in my state) just to get a case started, and if the firm refuses to settle, you could be in for a long and costly trial. However, your attorneys' fees can be reimbursed upon your winning your case. You'd better have good documentation for this route.

If you can afford to sue, do it, and if you suspect others have been victimized, file the suit as a class action lawsuit so your attorney can publicly solicit others similarly wronged. If other plaintiffs come forward, you can split the costs of prosecution and recover those costs if your case is won.

If you cannot afford to bear the costs of filing a class action suit alone, you're stuck soliciting others up front by yourself. This is extremely tricky -- refer to the section ahead on the anti-SLAPP law.

I'd personally like to see more former employees refuse to settle and pursue a trial and ultimate judgment against the firm, since a judgment is more damaging. Scammer firms know that few of the young, impressionable people they recruit will have the guts to sue and will likely just "chalk it up the experience," but you may feel a duty to future recruits to make sure a judgment is on record so they will have their chance to avoid your mistake.

Start here to use the American Bar Association's "Lawyer Locator."

4. Recourse #4: REGULATORY AGENCIES. If you feel you've been defrauded or scammed, complain! You may not be the only one, and you may be aiding in shutting down a scammer firm by letting your voice be heard. See the Links and Resources page for more information.

II. Legislation. Here are some of the laws I'm aware of which may be used to protect you in fighting back, but be aware that they need work.

1. The "Anti-Pyramid Promotional Scheme Act of 2003" (HR 1220 IH)

This recent bill has been under consideration to aid in shutting down illegal pyramid schemes, though it appears to have some severe flaws and even deceptive language pushed by MLM promoters. HR 1220 IH defines the following characteristics. Pyramid schemes:

(A) finance returns to participants through sums taken from newly attracted participants;
(B) promise new participants large returns for their investments; and
(C) use unfair and deceptive sales tactics, and lead to the victimization of unwitting individuals.

Convincing legistlators to apply this law to scammer firms will be tricky. It was designed to stop chain letters and similar schemes, but I contend that this law should be amended to protect consumers of jobs as well:

1.) A scammer firm finances returns to participants through sums taken from newly attracted participants. The manager's income is dependent on attracting a constant stream of new reps who will pay for "training" and whose contacts may be mined. Product sales are arguably incidental to the continued viability of the business. A rep's goal is management so he can perpetuate the scheme.
2) A scammer firm promises new participants large returns for their investments. The target market sought by scammers consists largely of people who would otherwise stand a pretty fat chance of making the income that is represented to them. Their "investment" is their education and career track, and even a "business" if they are classified as an independent contractor.
3) A scammer firm uses unfair and deceptive sales tactics, and leads to the victimization of unwitting individuals. The income represented by the firm is unattainable for the vast majority of participants, though promoted otherwise.

A list of HR 1220's sponsors & co-sponsors is here. To locate and write to your local representative about amending the bill, click here.

NOTES:

• Pyramid Scheme Alert does NOT support the "Anti-Pyramid Promotional Scheme Act of 2003" bill (HR 1220). PSA makes a good case that HR 1220 is being pushed by MLM lobbyists and contains language that would in effect legalize any product-based pyramid scheme. They point out that a nearly similar Utah bill, HB269, was defeated in March 2005 after public outcry over its deceptive language. Another state bill (this time in Florida), HB 2648, attempted much the same in May 2005. PSA points out that some legislators supporting these bills have received generous contributions from MLM supporters.
• Amquix.info, an anti-Amway site, points out that HR 1220 co-sponsor Sue Myrick (R-NC) received the "largest single soft money" donation to any campaign (House or Senate) in the 1994 congressional elections. A 1998 Mother Jones article lists her as an Amway distributor.
• The Direct Selling Association (DSA) supports HR 1220; see their page on it. DSA members include Amway and Primerica. Any respect I may have had for the DSA evaporated after I found that they had attempted to hijack rival Pyramid Scheme Alert's traffic by registering mistypes of its name (eg. pyramidschemealert.com, .info, .net, .biz, etc. -- PSA's website is actually pyramidschemealert.org).

2. The Anti-SLAPP Law.

This law needs work too.

If you have left the business broke and need to sue, you may need to seek other similarly wronged reps to pool finances towards the hiring of an attorney in a class action lawsuit. If you kept in touch with former workmates, call and ask them privately about their experiences there and see if they match yours. If you didn't keep in touch with everyone who worked with you at the firm, you can attempt to locate those people. Switchboard.com is one place to start.

If you didn't keep in touch with everyone and can't locate them, you will be forced to publicly solicit other similarly situated individuals who can agree to pool legal resources. This is why you need to know about SLAPP/anti-SLAPP laws. SLAPP lawsuits ("Strategic Lawsuits Against Public Participation") are lawsuits instigated by a firm against critics in which it will attempt to silence possible critics by crying "libel!" or "slander!" Just posting a message to a public forum inquiring about others' negative experiences with a firm can get you sued. The firm can cite your post as a "conspiracy" to solicit others to defame them! The truth doesn't matter; you'll be forced to legally defend yourself before you ever get your own suit mounted. (Although the Communications Decency Act has been consistently interpreted as holding operators of print media such as newspapers, websites, message boards, and the like not liable for the comments and opinions of third parties, many of those operators will simply remove your post and give up your identity rather than fight legal pressure from the firm. Your name might just replace "John Doe #1" in the SLAPP suit.) Since many victims cannot afford attorneys' fees to defend themselves, a common outcome is that they settle out of court on the "defamation" case with the agreement that they will never again speak of the firm (permanent injunction). You don't want that happening to you when your goal is to talk to others about the firm in order to mount a class action suit. Stick to soliciting information only, and discuss that information privately.

(For an interesting case explaining how one company attempted to silence critics in an alleged "SLAPP" case, read "Free Speech and the Internet: a Fish Story" at Salon.com. MlmSurvivor.com's Article on "SLAPPs" has an interesting examination of Amway's attempts to protect its image. It supports the argument that a company need only name or continue to name critical website operators as defendants in unrelated cases to drain their finances and force closure of their sites. All cases were dismissed, but most sites closed.)

There is no guarantee that you will never be the target of a SLAPP. However, according to the California Anti-SLAPP Project's website, certain types of homeowner and business insurance may protect you if you're SLAPPed.

The Anonymous Internet Foundation, Inc. may be able to help SLAPP victims obtain legal representation, even on a pro bono (for the public good) or reduced fee basis.

Both laws above could protect you, but cases of this nature are still cutting edge, and the past rulings I know of have been inconsistent at best. Your case could set the first precedent in applying existing laws successfully once and for all, but new legislation altogether may ultimately be warranted. Start here to contact your local legislator about these laws and lobby for better consumer protection.

The next section, "Networking," provides information on getting in touch with others so you can avoid the scam to start with or pool resources to prosecute if you've been a victim.