Evelyn Pringle January 13, 2005
The paperwork involved in the endless stream of lawsuits filed against Amway and its Kingpin distributors over the past 2 decades would probably fill a 10 story office building. The complaints and discovery documents filed in these actions, which Amway has fought so hard to keep hidden, outline 20 years of fraud perpetrated on millions of unwitting and vulnerable recruits all over the world.
There have been so many suits filed, that the company's attorneys can't even come up with an exact number. In 1985, Amway Diamond Rick Setzer sued Amway. During the discovery process, in a request for production of documents, Setzer's attorneys asked for:
"Copies of all lawsuits filed against Amway corporation and or Richard DeVos and or Jay VanAndel for the past 10 years."
This was Amway's response, in part:
"The request imposes an undue burden in that the number of lawsuits filed against Amway Corporation and/or Richard DeVos and/or Jay Van Andel for the past ten years represents literally thousands of lawsuits, with the file on each lawsuit varying from several pages to entire rooms filled with documentation." Affidavit in Support of Defendants' Objections to Plaintiffs' First Request For Production of Documents.
Even if "thousands" only means 2000, over 10 years that means 200 law suits were filed each year. That number is astronomical when you consider that the number of distributors who actually go so far as to file a lawsuit is but a small percentage of the actual number of distributors who fall victim to Amway each year.
If people took the time to read the records contained in these lawsuits, they would find a common theme: Amway is a pyramid scheme; the tools business is a pyramid scheme; recruits are lured in by exaggerated income claims and flamboyant displays of wealth; retail selling is ignored in favor of self-consumption of Amway products; distributors and potential distributors are pressured to buy tools and tickets to motivational rallies.
Founder Jay Van Andel's former speechwriter, Don Gregory, described how Amway preys on new recruits. "Recruits are brainwashed into spending a fortune on peripherals while consuming Amway products. They either lose their shirts or begin making money by getting enough people underneath to do the same," he said.
Eric Scheibeler is a former Amway insider turned whistleblower and FBI witness who has written a book about his experiences in Amway, entitled Merchants of Deception. (A free advance copy of the book, Merchant's of Deception, may be downloaded for a limited time at www.merchantsofdeception.com).
According to Eric, the 1970 FTC ruling requires that the majority of products going through a MLM must be sold to an end consumer (a non distributor) in order to not be considered an illegal pyramid scheme. This is referred to as the retail sales rule. Yet Eric says that he and his wife were taught to build a business that relied almost entirely on self consumption, which he has since learned is illegal.
A prime example of this excessive sales for self-consumption is still going on today, 30 years after the FTC issued its ruling, is the July, 2004, IRS case against Amway distributors, Kay and Randall Ollett. When testifying, Kay told the court that about 70-75% of their sales were a result of products purchased by her and her husband for their own use. The Olletts purchased almost all of their household products through their distributorship, including soap, shampoo, deodorant, dish-washing liquid, detergent, facial products, food items such as health food bars and energy drinks, a water treatment system, and even clothing such as men’s socks, slacks, and sport shirts.
The Tax Court ruled against the Olletts and would not allow the couple to claim tax deductions for expenses related to their Amway activity.
Eric also explains how the "tools" business of selling books, tapes, and videos is also an illegal pyramid because it is a closed system and no product is ever sold at retail to a consumer outside the group. Which means recruits unknowingly become involved in not one, but two illegal pyramids, when they join Amway, according to Eric.
The downline distributors are never told that their upline is making as much or more from the sale of tools as they are from the sale of products. The distributors assume that the lifestyles of their upline are attributable to their Amway businesses, and buy more tools hoping to achieve the same success.
So it becomes a never-ending cycle: the more tools the downline distributors buy, the more successful upline distributors appear; which in turn motivates downline distributors to buy more tools. Over 99% of low level distributors eventually quit, or go broke trying to hang on long enough reach a level where they too can get a cut of the tools profits.
In the 1998 New Hampshire case of Lavoie v Yager, Ruby directs alleged that their upline cut them off from the tools profits, and also alleged unfair trade practices, illegal chain distribution scheme, interference with advantageous relations, securities fraud, under the RICO Act. The complaint in this case is unique in that it contains details on the inner working of Kingpin Dexter Yager's system, and it also follows the progression of a distributor through the system.
Another wealth of insider information can be found in the 1998 Morrison v Amway suit. 29 distributors filed a lawsuit and revealed many of Amway's best-kept secrets. The suit alleges that the distributors make the majority of their income selling tools rather than products and that distributors in the downlines are coerced into spending money on tapes and functions by being told that they have no chance of success unless they do. It also alleges that tools profits are used to control and coerce downline distributors, and that those who ask questions or refuse to play the game risk having their businesses destroyed
The 1998 Vernon v Amway case seems to substantiate Eric Scheileber's claim that Amway recruits unknowingly become part of 2 illegal schemes when they join Amway. This case sought damages incurred by: fraudulent inducement in causing plaintiffs to participate in an illegal scheme to purchase and sell motivational tapes and tickets to Amway events; and conspiracy to fraudulently induce them to enter into an agreement to execute what they believed to be an Amway Sales Plan.
In addition to all the schemes described in the 1000s of complaints filed in civil suits, Amway’s long history of illegal activity is also well documented in criminal court files. In fact, one particularly scathing report compared the Amway business structure to the business structure of organized crime groups and found them nearly identical.
The report was submitted by an expert witness in a lawsuit filed back 1998, but Amway was able to keep it hidden until early 2004 when it suddenly began showing up on the internet. Here's what Amway does not want you to know. After an in-depth study of Amway business practices, the nation’s foremost organized crime expert, Professor G Robert Blakey, reached the following conclusion:
“It is my opinion that the Amway business is run in a manner that is parallel to that of major organized crime groups, in particular the Mafia. The structure and function of major organized crime groups, generally consisting of associated enterprises engaging in patterns of legal and illegal activity, was the prototype forming the basis for federal and state racketeering legislation that I have been involved in drafting. The same structure and function, with associated enterprises engaging in patterns of legal and illegal activity, is found in the Amway business.”
It should be noted that Blakey has impeccable credentials as an authority on organized crime. His legislative drafting experience resulted in the passage of the Organized Crime Control Act of 1970 (RICO). He was also directly involved in drafting and implementing RICO-type legislation in 22 of the more than 30 states that enacted racketeering laws.
Wisconsin Attorney General Takes On Amway
As far back as the early 1980s, Amway was warned that the media and law enforcement agents were monitoring its conduct in a number of states. One internal memo that surfaced in a lawsuit, dated December, 1982, to Jay Van Andel, from Casey Wondergen, was titled: Subject: Distributor Activities Drawing Legal and Media Heat On Amway.
The memo specifically notified Amway leaders that the company was being investigated by Attorneys General in Wisconsin, California, Oregon, Minnesota, New York, and possibly New Jersey and Connecticut.
The state with the most active investigation was Wisconsin. The attorney general’s office conducted an in-depth investigation and determined that Amway: (1) Did not accurately portray the income experience of persons who had participated in the business under the current Compensation Plan, and (2) Did not indicate the percentage of persons who had actually achieved the earnings levels being used as illustrations, and therefore, Amway had violated Wisconsin’s trade practices law.
The attorney general determined that the actual average annual adjusted gross income for each of the approximately 20,000 Wisconsin distributorships was $267, or 2.2% of the projected $12,000 income. During 1979-1980, only about 139, or less than 1%, had an adjusted gross income in excess of $12,000. In fact, the average net income (after expenses) was a net loss of $918. (State of Wisconsin v Amway Corporation et al, 7/82).
In response to his findings, the attorney general obtained a consent agreement requiring Amway to disclose actual sales and actual income or profit experiences of active Representatives when it used hypothetical examples. The agreement required Amway to disclose the percentage of Representatives who actually had achieved any level of performance which was being used for illustrative purposes.
Amway was further required to disclose the percentage of active Representatives versus those who had become inactive. A number of distributors were also fined for illegal misrepresentation of income.
FTC Takes On Amway
In 1979, the FTC rendered a determination in response to charges that Amway's claims about the amount of money distributors earned had the capacity to deceive potential distributors. As a result, an order was issued that prohibited Amway from misrepresenting the amount of profit, earnings or sales its distributors were likely to achieve. The order also required that whenever Amway made above-average earnings or sales claims, it had to also disclose clearly and conspicuously either the average earnings of all distributors or the percent of distributors who actually earn the amount claimed.
In 1983, the FTC took Amway back to court after it determined that the company had violated the 1979 order by placing an ad in major newspapers that represented the earnings of distributors without the required disclosures. The FTC complaint charged that the ad contained earnings and sales claims that were higher than the average income earned in any recent year. In addition, it charged Amway with violating the 1979 order for failing to include a clear and conspicuous disclosures in the ad of the average earnings or sales of all distributors or the percent of distributors who actually achieved the results claimed. Amway was $100,000.
Canada Takes On Amway
In 1983, Amway was involved in another criminal case in Canada. Canadian authorities charged that Amway set up dummy companies and created fictitious trade between them to get customs to accept a lower value for goods. The company was charged with evading duties and taxes by using false invoices to misrepresent the value of products it shipped across the border.
Key documents used in the fraud were provided to Canadian authorities by whistle blower, Dorothy Edgar, who was an executive secretary to Edward Engel, Amway's then vice-president of finance. Engel learned of the fraud in late 1977, and urged Amway to disclose it to Revenue Canada. When Amway refused, Engel and Edgar resigned.
In response to the charges, Amway and Amway Canada Ltd agreed to plead guilty to charges of defrauding the Canadian Government and were fined $20 million. As part of the plea bargain, Amway was required to sign a statement acknowledging that the allegations by the Canadian government were "substantially correct.” All total, Canada billed Amway $148 million in back customs, duties, taxes and penalties.
In 1989, the Canadian authorities took Amway back to court to collect the back duties, fees, and fines that the company had agreed to pay in the 1983 settlement agreement. Although the Canadian department of Revenue claimed Amway owed $148 million, the case was finally settled for $45 million.
Eight years later in 1996, the Canadian government took on Amway again to challenged its attempt to claim a tax deduction for fines it paid for the 1983 criminal conviction on tax fraud. The court ruled that Amway could not treat the fines paid for tax evasion as a tax deductible expense.
When considering the validity of the 20-year stream of lawsuits against Amway, a person surely has to wonder why thousands upon thousands of people would make up the same lie.