Saturday, January 25, 2014

BREAKING NEWS: Herbalife may also be under investigation in China

When reports of NuSkin representative's alleged misconduct surfaced in Chinese media back in June and July 2013 in China it received little western media attention. However, when the Chinese Communist Party media People's Daily repeated the allegations, and called for local authorities to investigate and stamp out pyramid schemes and pyramid selling, western media noticed, and NuSkin stock took a dive, and Herbalife stock also took a dive because it's already under attack in the US. 

Turns out, Herbalife may be under more direct threat than people realized, as NYPost managed to find a report in August 2013 in First Financial Daily (of China) that Herbalife reps in China encouraged front-loading and thus is in violation of anti-pyramid-selling laws in China, among other potential law-breaking.  Quoting from the report... 
Recently, First Financial Daily discovered through private investigation that, while Herbalife is fast growing in the China market, its sales model is suspicious in five respects: collection of "recruitment fees" in disguised form, suspected exaggeration of  product effects, possible windfall profit derived from products, fast growing clubs absent of strict supervision and control, and product purchase overly dependent on sales representatives or potential sales representatives…… A series of issues have deviated the direct selling model of this company, and have contradicted with certain provisions in the "Regulations on the Prohibition of Pyramid Selling" promulgated and implemented by the State Council in 2005. As a result, suspicion has been brought up that Herbalife's sales model is a pyramid scheme. 
The specific offense mentioned first in the report is reps are required to buy $2000 USD worth of Herbalife products to join. They're told that 1) it's easy to sell, 2) it demonstrates that they are serious about this opportunity, and 3) there are plenty of people who want to join and only limited positions available.

There's a lot more.

Bad Propaganda: Perpetuating Myths and Misunderstandings to Deflect Criticism

Editor's Note: This is start of a new segment 'Bad Propaganda' where I will analyze bad propaganda used by various MLM promoters who, whether intentionally, or by accident, or perhaps, even ignorance, perpetuate myths, misunderstandings, half-truths, and "spin" to promote their MLM when they don't have to. I've done this several times before, but usually as some sort of rebuttal (for Wazzub, Zeek, TVI Express, and other scams). This will make it a new 'regular feature'.

When a new MLM recruit wants to express their enthusiasm for their new venture, one of the things they do now is create a web page, esp. if they wish to market online. And one of the frequently asked questions asked about many MLMs is "isn't it just a pyramid scheme?"  There's the right way to answer it (explain the Koscot test and why MLM does NOT fit the Koscot test... if done correctly)... and then there is this way... done by a Vemma Rep.

In order not to embarrass him too badly, his name will not be used, and URL will NOT be included (don't want to give him any LinkJuice), but you can see a picture of his web page below...

The title is "Vemma : Scam or a legitimate opportunity for you and your friends" by "Nick".

From here on, his stuff is in blue, and my counterpoints will be in red.

You might be wondering if there is an opportunity to make money with Vemma, or if the Vemma scam allegations are true. Don't worry you have come to the right place seeking answers so look no further.

Wow, he claims to be the ONLY place on the web to offer answers about Vemma, look no further! This guy is full of himself, isn't he?

Nick (censored) is a 21 year old adventure seeker, who went from scrubbing dishes at an old hospital for minimum wage to traveling the Northwest and has built a distribution network of close to 1,000 people in the past 12 months. He has inspired young entrepreneurs into taking charge of their lives, and isn't afraid to challenge the status quo. CLICK HERE to learn about how you can become one of the next success stories on his team, and work personally with Nick and the other leaders of Treasure (censored) Vemma.

The standard rags-to-riches underdog story that appeals to the "rebel youth" crowd. 

   There are many Vemma reviews on the internet that make claims about the company, and for someone who wants to cut straight through the BS you need answers. So lets get to the bread and butter, but know that multi level marketing scams are hard to detect so in this article I will help you swim through the sludge of information on the web.

    In order to confirm or deny if Vemma is a scam you need to understand what the company is. They are a health and wellness business based out of Scottsdale Arizona. Founded in 2004 by Bk Boreyko, Vemma has done over 1 billion dollars in sales over the past nine years. Pretty big for a scam i'de say.

First paragraph is a completely waste of space, as it said nothing. Second paragraph started off wrong. To know whether Vemma is a scam, you need to define what a scam is, not what Vemma is. That comes second.

That was segued into a "too big/old to be a scam" myth, though he did couched it as a personal opinion, bad spelling and all.  Go look up FHTM should tell you it lasted 11 years before being shut down by the FTC as a pyramid scheme. Bernie Madoff's ponzi scheme took even longer. Both are much bigger than Vemma. Clearly, Nick had NO IDEA what he was talking about. 

But wait, there's more! Lots more!

Friday, January 24, 2014

Scam Psychology: Intelligence is NOT Rationality

Many people have asked... How can intelligent people, lawyers, doctors, people who got rich through their own efforts, and so on, end up joining a scam? Aren't they intelligent enough to avoid such things? Some even use this as a bad argument that I termed "association with authority" argument, such as "X is not dumb or stupid, therefore he could not have joined a scam. Thus, whatever he joined cannot be a scam."

Turns out psychologists knew about this problem for a while, and the explanation is very simple: intelligence is not the same as rationality.

Intelligence is usually defined as "ability to acquire and apply skill and knowledge"

Rationality, on the other hand, is  "the state of having good common sense and sound judgment".

The two definitions can overlap, butare not required to overlap. It is possible to have no sound judgment, yet have ability to acquire and apply skill and knowledge. A savant, for example, esp. an "idiot savant", has the phenomenal abilities such as mental math, perfect recall, photographic memory, and so on, yet has virtually no judgment or social skills outside of his/her expertise.

Of us the common people, we are just as guilty of what appears to be irrational decisions, caused by our various cognitive biases, and often, what we WANTED to be true. We are intelligent, but we are NOT always rational.

And scammers are very quick to convince us that being intelligent is being rational... and it's rational to join their scheme. And scammers are often amateur psychologists exploiting your cognitive biases to coerce you (without you realizing it).

Thursday, January 23, 2014

The Real Reasons Why Network Marketing Needs Reputation Management

It's interesting how the topics in this blog suggest themselves: why network marketing needs reputation management. It's not because there's a bunch of "meanies" out there... though there are. It's usually because they have some actions that looks shady, and people will point that out.

Recently, a company called BidForMyMeds was reviewed on BehindMLM. The company employed a whole slew of questionable conduct, including listing some other company's management as if it's their own, and implying a far tighter integration between the two companies than there actually is.  The truth is BidForMyMeds is a marketing company that markets BidRx through MLM. However, BidForMyMeds at many times implied that they are BidRX, and borrowed various BidRX media as if that is them.

So Oz / BehindMLM published the review with the questions, wondering if BidForMyMeds is really authorized to by BidRX as it is not behaving ethically. Within hours, Oz was sent a "cease and desist" email by BidForMyMeds' lawyer who demanded the review be taken down. Oz, who knows his rights, put the threat online instead, with even MORE questions and other information received, revealing that BidRX has multiple marketing partners, none of them pretended to be BidRX. And the MONTHLY fees ($7) that BidForMyMeds charged is almost 300% the cost charged elsewhere for BidRX ($2.50), and so on and so forth. AND if you pay even more ($17), you can benefit from recruiting other people who also pay the monthly fee.

That alone takes it into the potential pyramid scheme territory.

Then Kevin "The MLM Attorney" Thompson posted an entry on his blog about Cease and Desist.. cited Oz's reaction, then discussed when C&D should be used, and when it's an empty threat.

In the comments is a Mr. Jonathan Gilliam of Momentum Factor, touting their reputation defense can deal with "online Meanies".
...Our reputation defense team similarly serves
at the front end of a company's need to "do something" to combat online
Meanies. Lawsuits as you know are often just too distracting, involved and
expensive for some CEOs.
The good news is, companies CAN
defend themselves, often without the Meanie even knowing, via online
suppression strategies...
In other words, he just spam-commented a lawyer's blog with an ad for his firm. :)

And he basically claimed that he can "bury" negative comments through "suppression", which may or may not involve shill reviews. :)

But what's *really* surprising is what sort of people would employ Mr. Gilliam's firm...

Tuesday, January 21, 2014

BREAKING NEWS: NuSkin suspends recruitment meetings in China (until further notice)

Amidst charges by Chinese government that its agents are running a pyramid scheme, NuSkin today announced that it is suspending all recruitment meetings in China (until further notice).

NuSkin is an American MLM but operates as direct sales in China... officially. However, many local newspapers have reported, since June 2013, that many NuSkin sales teams actually operate as Multi-level Marketing, which is ILLEGAL in China, complete with pyramid organization. Many were alleged to also make fradulent health claims, and employ cult brainwashing tactics on participants.

NuSkin announced only hours ago, on 21-JAN-2014 that it will suspend all recruitment meetings in China pending further review of training, and blames a few overzealous reps of using unethical tactics to drive sales. It maintains that the reports in Chinese newspapers are exaggerated and are not typical of its presence in China.

Critics noted that it does not preclude person-to-person recruitment.
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MLM Dictionary: Pyramid scheme

A pyramid scheme is a type of financial fraud that usually disguises itself as a business, but the participants earn compensation by first paying into the system some sort of fee, in exchange of right to recruit additional participants and sell the product / service, and will be compensated primarily by the number of additional participants they recruit (who also pay the fee). Little if any of the compensation will be based on actual sale of the product or service.

The earliest pyramid schemes, and modern HYIP matrix schemes, are investment frauds, in that you pay in (buy a position), recruit others, then when enough people joined, you are "cycled out" and get the big payout. This has lead to much confusion in modern times where scammers insist on using the original definition of pyramid scheme and insist their business cannot possibly be a pyramid scheme (by the old definition).

In the US, pyramid scheme is defined by the Koscot Test.

Pyramid scheme is related to Ponzi scheme, but pyramid scheme requires participants to recruit in order to be compensated, whereas the Ponzi scheme do not require recruiting.  There are many other differences between pyramid scheme and Ponzi scheme.

Pyramid schemes are known by several names to law enforcement, including franchise fraud, chain referral / endless chain, matrix scheme, and pyramid selling.

Franchise Fraud 

Franchise fraud is mainly used by the US Federal Bureau of Investigations (FBI), it stated:
pyramid schemes — also referred to as franchise fraud or chain referral schemes — are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses
Basically, this sort of pyramid scheme sells the opportunity itself, rather than the products. Thus, it is a disguised pyramid scheme.

Note that franchises are governed by franchise laws, under the purview of the Federal Trade Commission (FTC), which also prosecutes pyramid schemes on the Federal level as consumer fraud.

Chain Referral / Endless Chain

In many US states, including California, "endless chain" is the same as pyramid scheme. The California Office of the Attorney General (OAG) writes:
Millions of Americans have lost money participating in pyramid schemes which are also known as "endless chains" - - because they cannot work unless the chain is endless and, of course, it cannot really be endless because at some point there are no more people willing to join the scheme.... An "endless chain" or an unlawful pyramid is a plan in which a person pays money or buys merchandise for the chance to receive money when additional participants are introduced into the scheme.
Chain referral scheme can also describe a fraudulent sales plan, where you order an item at the given price, but if you can make friends and family to also buy the same item, your price of the item will be reduced (possibly all the way up to free).  However, in reality, the item is vastly overpriced, and the demand for the item is vastly exaggerated. This was prosecuted many times by Postal Inspectors as mail fraud in the 1970's.

Please note that referral sales is ILLEGAL in the US, and if a company offers such a plan... It may be in legal trouble.

Monday, January 20, 2014

BREAKING NEWS: SpeakAsia head Manoj Kumar Sharma found dying in Singapore Hospital

IDG relayed an article from Singapore... Apparently Manoj Kumar Sharma, head of Speak Asia, and fugitive from India, is dying in a Singapore hospital, and contacted a writer, and want his story to be told in another book by the author. 

The author instead published the article, where he tried to balance MKS's view (I did nothing wrong, they just don't understand my business) and what did the Indian authorities do (it's a Ponzi scheme). 

For those of you who are already convinced that you're on the right side, this is not going to change any minds, but rather, simply add fuel to your side of the story. Neither side (MKS, or EOW) had revealed all their cards. 

So read it, for what it's worth. And read all the footnotes too.
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Scam Psychology: Why Scammers Use Testimonials, and Why You Should NOT Trust Positive Reviews

Why do advertisements almost seem to have testimonials? Because they do influence us.

Human beings are social creatures, and we do learn from each other, so when we hear testimonials, we pay attention. This is sometimes called 'social proof'. Some benefits from testimonials include:

  • It builds trust
  • It sound less sales-y
  • It demonstrates the benefits of products/service

The problem happens when we do not apply "crap filter" to testimonials, and scammers start to seed the testimonials with fake entries. In fact, you can find people who will do fake testimonials for you for a mere $5.00 USD on  Furthermore, in the modern world of information overload, people are less and less likely to fact-check or do "due diligence" on common stories.

Image representing Yelp as depicted in CrunchBase
Image via CrunchBase
It's estimated that in a few years, 20% of all reviews online (including testimonials) will be fake. The crowd-review websites such as Yelp, AngiesList, and so on who rely on testimonials and reviews are starting to combat this problem, and even government have started to notice such problems.

So you should NOT trust positive reviews, but seek to verify the claims.

And if you do find a sincere positive testimonial, it may STILL be "wrong"... in that the testimonial may be influenced by the five factors that result in a sincere but fake review.

Sunday, January 19, 2014

MLM Dictionary: Amway Safeguard Rules

English: Honda- Amway(AVCL)Hồ Chí Minh
English: Honda- Amway(AVCL)Hồ Chí Minh (Photo credit: Wikipedia)
Amway Safeguard Rules represents a set of "rules" (actually concessions) implemented by Amway when it was sued by the Federal Trade Commission (FTC) in 1975. With the reform of the compensation plan where the IBOs (independent business owners, i.e. sales affiliates) are only paid for what they sell and what their downlines well, and the provisions in these rules, FTC reluctantly agreed that Amway does NOT fit the Koscot test for pyramid scheme. This was finalized in 1979, and became the basis for the entire "multi-level marketing" industry.

In the successful 1975 FTC prosecution of "Koscot Interplanetary" and earlier prosecution of "Dare to be Great", FTC specified the four specific problems they have with the pyramid scheme:

  • a) Large membership fees (Dare to be Great can cost up to $2000 or more in 1970's!)
  • b) Front-end loading (buying a huge "starter kit") and inventory loading (buying so much inventory just so your upline can get the commission)
  • c) Programs in which distributors were misled as to the amount of commission they might reasonably earn (misleading income claims), and
  • d) Programs in which commissions were not based on the sale of product to the ultimate consumers. (no true retail customer means it's a money circulation game)

SEC had also previously joined in the prosecution of "Dare to be Great" in 1973, as it considered a pyramid scheme similar to a ponzi scheme...  you put in money, and you expect to get more out of it with rather minimal effort, via the rule known as the "Howey Test".

In fact, many states as well as the US Postal Service have also joined in the prosecution of misleading direct sales, esp. those sent through the mail. Some argued that this patchwork of regulations, different from state to state, created such a hostile atmosphere for direct sales that it would have perished...

An infamous player of this era is called Cambridge Plan International, founded by Jack and Eileen Feather. Some of their most infamous products are "Mark Eden Bust Developer" (diet supplement to make women's boobs bigger), "Astro-Trimmer" (diet supplement that shrinks your tummy fat), and their namesake, the "Cambridge Diet", powdered drinks, soup, and such, only 350 calories, developed by Cambridge professor!  Cambridge eventually went bust when it tried to shift from mail order model (prosecuted multiple times for mail fraud) to direct sales, then the direct sales went bubble and burst. It started with 25 reps in 1981, to 150000 reps in 1982...  and declared Chapter 11 bankruptcy in 1983.

Direct sales basically would not have survived had Amway not survived the FTC lawsuit, and it did not survive unscaped. The ruling, 1979 FTC vs. Amway, resulting in a consent decree where the company agreed to several fundamental changes, that became known as the "Amway Safeguard Rules". (Incidentally, Amway also agreed to tone down income claims, and agree not to restrict the power of affiliates to set prices, i.e. price-fixing).

So what are the Amway safeguard rules? It's quite simple... 3 simple steps.