Evelyn Pringle January 17, 2005
Every year, Amway rips of millions of people all over the world through a secret pyramid scheme that will no doubt continue for as long as Bush is in office and controls the Federal Trade Commission.
The scheme was the subject of the May 7, 2004, edition of NBC's Dateline, when it aired an expose that revealed that the main income of the Amway kingpins does not come from the sale of products, that it comes from the sale of books, tapes and seminars tickets (also known as "tools"), in a secret program operating under the cover of the Amway sales organization.
Dateline determined that about 20 high level distributors are part of an exclusive club that has "run hugely profitable businesses, selling all those books, tapes and seminars -- things the rank and file distributors can't sell themselves, but are told over and over again they need to buy in order to succeed," it reported.
Its easy to understand how people get roped in. They are told they can make millions of dollars by working part-time. Dateline reporters took hidden cameras to an Amway recruitment meeting and the first thing they heard was how easy it was to make big money in Amway. Dateline's Producer, Tim Sandler, posed as a member of the audience, and listed as speaker Greg Fredericks, said:
“If you're somewhat serious, all I mean by somewhat serious -- if you invest maybe, say, 10 to 15 hours a week in your business. This is your own business -- you could generate in the next 12 to 18 months, an extra quarter of a million.”
Sandler asked, “How much?” And Fredericks repeated, “A quarter million.”
Sandler again asked, “You're making more than $250,000 -- quarter of a million?” And Fredericks said, “Umm hmm.”
Former high-level distributor turned whistle-blower, Eric Scheileber, tells how he listened to the claims of the Amway kingpins and took the bait - hook, line and sinker. “I thought if I could create a six figure income and spend time with my family, I'd do anything for that,” he told Dateline.
"But instead of a life of leisure and more time with his family, he says he worked day and night, buying the tapes, attending the rallies. Still, he made nowhere near the six figure salary ... in his best year he made $34,000 and even that didn't last," Dateline reported.
(Eric has launched the website www.merchantsofdeception.com, and written the book, Merchants of Deception, which reveals the details of the secret tool business. A free advance copy of the book is available for a limited time on his website).
Vicki and Lindy Mack had a similar tale, "they not only didn't make money, they lost more than $35,000 over a five year period. Much of it on books, tapes, and traveling to rallies."
How Does The Scheme Work?
First off, new recruits are told to quit shopping at stores; to use Amway products only. According to Eric, the company assigns a point value (PV) to all products and the average distributor's household is expected to personally self-consume 100 PV, or between $175-$450. Now keep in mind, that Amway convinces hundreds of thousands of people to do this each year.
Which brings us to the next step. The new distributors are then sent out to recruit other people to do the same thing. But the sale of products is not the source of the large income. The sale of the so-called "tools" is. Upon joining the company, a recruit is given a list of hundreds of books and tapes, which is described as the motivational system that is the key to success in Amway.
The next step to become a distributor, is to develop a goal sheet with the emphasis on selling more and more tools each month. However, in order to sell tools, the recruit must convince other people to join and create a downline group to buy the tools, because they can only be sold to other Amway distributors.
How many people will he have to recruit? Well for starters, if the goal is 4000 PV a month, he would need 50 people in his group. But if he set his sights on becoming a Profit Sharing Direct (Direct), that requires doing 7500 PV ($15,000) for 6 months in a row. As a Direct, Eric says a distributor is told he will be making over $50,000 a year in a business structured 9-4-2; which means, you sponsor 9 people, who each sponsor four people, who each sponsor two, all of whom do a monthly volume of 100 PV.
To give you an idea of what this would entail, to reach this goal, a distributor would need 80 people in his downline. But there's much more to it than simply getting 80 people to join Amway. To move 7500 PV, the distributor would need to sell the tape of the week to 40 people - every week. He would also need to sell 200 more tapes, 75 books, and 16 kits, and 25 boards and easels.
And on top of all that, according to Eric, he would have to get 40 distributorships to buy tickets to monthly seminars, which translates into 80 tickets, since the distributorships are usually run by married couples. After hearing all this, its not hard to figure out why 99% of all Amway recruits never make a dime.
But it gets worse. In order to move up to the next level and become a Pearl, a distributor has to help 3 separate groups do 7500 in volume in one month. This is no small feat; 22,500 PV amounts to about $50,000.
However, here's the kicker, this is the level a distributor must reach, before he receives a bonus based on the tools sold to his downline each month. The bonus is usually between 2 and 4% of the total BV in the group. Very few distributors ever make it to this level.
The month the Scheilebers went Pearl, their downline moved nearly $70,000 in goods. "This was where "the big money" was to kick in," Eric said, "We could not wait to get the check that month. ... we carried the mail in to our kitchen and opened the envelope together. We were shocked at what we saw. Our bonus ... amounted to about $64 dollars.
At this level, distributors are led to believe they will be making $80-100,000. However, even though the Scheilebers were working a combined 100 hours most weeks, their income was still only about $20,000 for that year.
Isn't There A Law Against Pyramid Schemes?
There is supposed to be a law against pyramid schemes. But its rarely enforced against its namesake, which happens to be Amway. In 1979, as a result of a case against Amway, the FTC issued 3 rules that companies had to follow as a guard against pyramid scheme fraud: (1) 70% of the products sold had to be sold to retail customers; (2) distributors had to maintain a base of 10 retail customers; and (3) if a distributor quit, the company had to buy back its inventory.
However, as the FTC prosecuted new pyramid cases in the 1990's, the law became refined, after many defendants claimed innocence by stating that they had adopted the inventory buy-back policy, the 70% rule, and the 10 customer rule deemed acceptable in Amway. This prompted the appellate court in Webster v Omnitrition Int'l, Inc, to point out that the "70% rule" and "10 customer rule" are meaningless if commissions are paid based on a distributor's wholesale sales (which are only sales to new recruits), and not based on actual retail sales. (Statement of Debra Valentine, General Counsel for the FTC, on Pyramid Schemes, May 13, 1998)
As it stands now, although the law's namesake remains the number one culprit when it comes to pyramid schemes, the company is allowed to flourish in blatant violation of every rule set forth in the 1979 FTC Amway law.
What Did Amway Know and When Did It Know It?
The various documents that have surfaced during discovery in lawsuits against Amway over the past 25 years, reveal that by the early '80s, Amway knew about the tool pyramids and knew they were illegal. An internal memo from the District Court in Cincinnati, entitled Amway Distributor Compliance With The Code Of Ethics And Rules Of Conduct warned the Amway hierarchy about the illegal systems when it reported:
"Widespread illegalities inherent in Amway distributor designed "systems" of tapes, books, and rallies. While most of these "systems" were conceived in the late 1960's and early 1970's as genuine "support" programs ... entrepreneurial "higher pins" discovered and developed programs for substantial, separate, additional income, under the Amway "umbrella,"" it said.
Another 1982 memo, to the Amway Policy Committee, entitled Challenge of the 80s, warned "how these "support systems" escalated to what we believe is now a threat to the future security of Amway Corporation, at least in the United States." It specifically stated, "... these "tools/systems" are illegal, per se, under several U.S. federal and state laws."
The Challenge memo, in part, listed the following problems: (1) That operating and/or participating in a ... scheme involving only non-consumer items - particularly motivational tapes - violates state pyramid/chain distribution laws, and could lead to Amway distributors being indicted and/or convicted of criminal fraud. (2) That regulatory agencies, particularly state Attorneys Generals, are increasingly sensitive to the ongoing emergence of such programs. ... (5) That Federal Trade Commission and Anti-Trust Laws are being violated through price fixing and collusion."
It advised that corrective statements should be made immediately to correct misleading statements being made by the diamond distributors to new recruits such as: "No Selling" "Not Amway" "Must Have Tape of the Week" "Must Attend Rallies to Succeed"
In yet another 1983 memo, from the Heckert v Amways lawsuit, Ed Postma, then Amway business conduct manager, warned the leaders about the personal agendas of the kingpins.
"If there are any discussions of any length with the Diamonds utilizing this system, it becomes clear that although they realize that they are Amway distributors, they consider their personal business to be the motivation business. I think there is little question that that is where the big money is made. The motivation business is also where their primary allegiance lies," Postma wrote.
The memo called the system illegal because: It is a pyramid; it sells only to those who are involved in its structure; it may violate tax laws; there is no buyback rule; there is a danger of inventory loading; and it could be construed as an employer/employee relationship.
Postma also noted the huge amount of money being made off seminars. "It is not uncommon for the profits on these functions to exceed $25,000 to $50,000 for a weekend or $250,000 for a Free Enterprise night," he said.
He described the phony displays of wealth being used to entice recruits to join Amway, "...accessories (jewelry, clothing, and automobiles) are made available to distributors so that they may appear successful. It is considered extremely important for Diamonds to show material success in the business," he said.
At about the same time that this flurry of memos was taking place, it appears that Amway did try to get the kingpins to knock it off. In a 1983 taped speech entitled “Directly Speaking,” (never supposed to be heard in public), Amway co-founder, Rich DeVos, told the Diamonds that their tool businesses were illegal:
"Let me talk to you about the legal side ... that deals with the illegal operation of a business that does not have an end consumer, where the product is not retailed. That would include all books and tapes. ... when those things go out that way ... beyond my ten or 20% theoretical guideline ... then it becomes an out and out illegal pyramid."
DeVos explained that the priority on the sale of tools instead of products was hurting Amway, "... all the tape business does is take money out of the organization, and because the final person can’t retail it, it never brings money into the organization. ... motivation is important ... But, it must be motivation that builds the business – not become a business in itself. And some of you have made it a business in itself ... I am imploring all of you to do two things. Number one, clean up your act. And number two, if you know people who are continuing to do things improperly ... just tell us who’s doing it."
Here's what DeVos said about ripping off downline distributors by having them buy tools and self-consume products: "if I'd been told ... you don't have to sell the product, all you have to do is wholesale it to people ... maybe I wouldn't pay any attention to pricing, either. But that's an illegal business. And those of you that ... foster it and talk about it are operating illegally."
He even barked about the bogus income claims the Diamonds were making to bring in new recruits without disclosing the profits they planned to make off the tools. "You present wonderful numbers on the blackboard about all the money they can make. Maybe you ought to tell them about all you're going to take from them before they make any. Maybe that would be the rest of the story," DeVos said.
DeVos made that statement in 1983, but according to former long-time distributor, Bo Short, nothing has changed. Bo says we rarely get the whole story when people talk about how much they make in Amway. "I heard people say countless times, "We made $250 last month!" What many of them did not say is that they spent $500 in books, tapes and seminars that same month. This is a net loss of $250," Short reports.
On the tape, DeVos, himself, as much as admits the tool systems are a farce, "achievement numbers haven't changed at all with this tremendous burden of systems. I and you cannot prove an any higher ratio of achievement than you had before," he claimed.
If tools were the key to success, DeVos, wanted to know, "Why don't I have a hundred thousand Diamonds if all it takes is the tapes? Why, it's so easy. Just give 'em the tapes, and they're Diamonds next week. ... Who you kidding? ... Do the tapes help? Sure, they help. Do meetings help? Sure, they help. Are they the answer between winning and losing? No, they are not," he said.
20 years later, Bo Short makes the same point. He tells distributors who stay in Amway for years, naively believing the system will eventually work, to "Look around the room at your next convention. How many new diamonds do you see being recognized? Where are all the new diamonds? Why are the same faces on stage while the ones in the audience seem to change periodically? ... If the system was working so well, ... there should be a steady flow of diamonds convention after convention, year after year," he said. The fact is the system does not work.
If You Can't Beat Em, Join Em
In 1983, Amway apparently gave up the fight, and decided to compete with the kingpins instead, by putting PV on tools, and allowing the downline distributors to participate in the profits. The uproar over this decision prompted DeVos to record another "Directly Speaking" tape.
On the second tape, he explained the company's decision. "Amway has been working for three years on the matter of how to cope with the tape business. Should the company get in it, should it stay out of it ... we are going to put BV on tapes. ... we will pay full BV..." he said. ... "it awards everybody fairly in relationship to what they do in it, it protects the upline, it protects the downline ... we have a little hooker in there ... the BV on tapes can never exceed 20% of your total Business Volume," he advised.
For what its worth, DeVos did specifically tell the diamonds not to try and force people to buy tools. "... they will always be presented on a voluntary basis. No strings, no pressure, and no force, and by 'force' I mean such as saying to somebody ... "You must take ten tickets. You must take a hundred tickets. Here's your hundred tickets. Pay me for 'em. You better get rid of 'em. We're going to fill this hall. Or saying, "You must subscribe to Tape of the Week, or I won't work with you."
That's force, he said.
But no matter what good intentions DeVos may have had, they did not last because in the end Amway joined forces with the kingpins and they became mutually dependent on one another for survival.
To help stifle any competition from the downlines and maintain their monopoly on the tool business, Amway implemented a rule that required all new motivational materials to be sent to the company for prior approval before any sale or use was permitted. In addition, the Amway Sales and Marketing Plan began openly encouraging new recruits to buy tools and attend functions regularly by stating:
"To assist you with your own training and motivation, as well as training and motivating others, some distributors produce and distribute Business Support Materials and support services independently of Amway ... These may include books, magazines, and other printed materials, audiotapes, videotapes, rallies, meetings and educational seminars. While these BSMs are not required ... you may decide that they can play a useful role in building a profitable Amway business...
"As your business begins to grow ... You will also want to attend motivational and business-building meetings. Typically, you may attend one distributor meeting a week," the manual advises.
The continuation of the scheme stop low-level distributors from earning any profits from the tool pyramid was verified by yet another document that surfaced in a law suit, which quotes Amway attorney, John Pierce, in a March 25, 2002, telephone conference, saying:
"98% of the IBOs (Independent Business Owners), should not participate in the income nor should they even be aware that there is an opportunity."
The fact is, absolutely nothing has changed in Amway. Every problem that downline distributors experienced in 1983, still exists today.
Why Doesn't The Media Expose This Fraud?
The media often refuses to take Amway whistle-blowers seriously due to a belief that a scheme as deceptive and illegal as what they describe would never be allowed to continue for so long. And that's the exact same point that Eric Scheibeler raises in his book, Merchants of Deception. How could a world-wide consumer fraud scheme of this magnitude be allowed to continue for over 20 years?
The answer, Eric says, is that our government allows it to continue. Amway stays in business because Bush controls the FTC and he refuses to allow the agency to enforce the anti-pyramid laws. In effect, Amway's political influence within the Republican party provides the company with insurance against prosecution for fraud.
The cost of this insurance is paid for by large political contributions, with 100% going to Republicans. For instance, Amway was the second largest contributor of soft money to the RNP in 2000. In 2004, company founders, DeVos and Van Andel, gave $2 million to the Republican 527 group, "Progress for America." (Newsweek, “The Secret Money War,” Sep 20, 2004).
It really is that simple. As long as Amway pays the premiums, the insurance coverage for the largest consumer fraud scheme in the history of this nation will remain in effect.