The Untold Story of Multilevel Marketing – Robert L. FitzPatrick
The Untold Story of Multilevel Marketing – Robert L. FitzPatrick
Multilevel marketing is the biggest scam on Main Street … And yet, it has the endorsement of the U.S. government and Wall Street institutions. Robert L. FitzPatrick captures the full scope of this problem in Ponzinomics: The Untold Story of Multi-Level Marketing. He sits down with host Charles Mizrahi to unpack this major financial scheme, how so many people fall victim to it and what to look out for.
- An Introduction to Robert L. FitzPatrick (00:00:00)
- What Is Multilevel Marketing? (00:1:45)
- Why People Fall for It (00:10:38)
- Pay to Play (00:18:30)
- Pillars of Multilevel Marketing (00:26:34)
- Psychological Manipulation (00:36:29)
- The Biggest Offenders (00:45:19)
- Red Flags (00:53:36)
- A Personal Journey (01:01:36)
Robert L. FitzPatrick is an author and authority in multilevel marketing schemes and pyramid sales fraud. He wrote the first book to critically examine the multilevel marketing industry and has been featured on NBC’s Dateline, ABC News, and CBS’ 60 minutes. FitzPatrick is also the founder and president of Pyramid Scheme Alert, which exposes and prevents pyramid scheme fraud.
Before You Leave:
ROBERT L. FITZPATRICK: Because it is far more than a business sham. It’s a very dangerous, entrapping, cultish movement here in which you can be sucked in and you could really become dominated and persuaded. Everybody is vulnerable to this.
CHARLES MIZRAHI: My guest today is Robert FitzPatrick. More than 5 million Americans each year are lured into pyramid sale schemes. Consumer losses exceed $10 billion annually, with many people losing their life savings. Robert is an expert in examining and revealing deception and fraud in bogus home-based businesses. He’s been featured on NBC Dateline, ABC World News and 60 Minutes. His latest book — Ponzinomics: The Untold Story of Multi-Level Marketing — is the first comprehensive account of how multilevel marketing was created in America, escaped criminal and civil prosecution and spread all over the world. I recently sat down with Robert and we talked about how more than 99% of the people that join pyramid sales schemes lose their money, squander time, and recruit their friends and relatives into the folly.
CHARLES MIZRAHI: Robert, thanks so much for being on the show. I greatly appreciate it. And I was looking forward to it since we last spoke and you sent me your book. Really good stuff.
ROBERT L. FITZPATRICK: Yes. Thanks, Charles. Thank you for your interest, too. And hopefully we can shed some light on this subject.
CHARLES MIZRAHI: All right. The name of the book, folks, is Ponzinomics: The Untold Story of Multi-Level Marketing. Now, before we even begin, could you explain in simple English what MLM, or multilevel marketing, is?
ROBERT L. FITZPATRICK: So multilevel marketing is a phenomenon, I would call it, a phenomenon that developed actually after World War II, but it really took off in America after 1980. It is described as a form of direct selling. In reality, very few people actually make money selling products. The key feature that distinguishes it is it is based upon what is called an endless chain — that is, the money that you gain is primarily from other sales people that you are allowed to recruit in a genealogy — a chain that never breaks, that never ends, rather goes on forever. So, you can join it 20 years later and you’re authorized to go and recruit more people, who can recruit more people, who can recruit more people — all of whom sell a product. That’s how the money is transferred. The money flows in a formula of allocation from the last person in all the way back to the first. And the formula concentrates that money to the top. So, you have this pattern of super wealthy people at the very top of these schemes, and there are hundreds of them now in the United States, and virtually everybody else makes nothing.
CHARLES MIZRAHI: So how big is multilevel marketing — companies that do this? Is there one company? Like I know Amway is one of them. Are there like ten, 20, dozens? How much are we talking about? And also, what type of dollar amounts?
ROBERT L. FITZPATRICK: Most people are shocked to know this, but this business is approaching $200 billion globally, and it’s over $30 billion in the United States per year — bearing in mind that it’s affecting 16 to 20 million people in the U.S. a year. About 1 in 6 households in the U.S. are involved every year. If you look at this on a more cumulative basis —which is the correct way to examine it — it is an ongoing phenomenon, churning people in and out, year by year. Virtually every household in America has been touched by it. I can’t meet anybody today who doesn’t have a multilevel marketing experience. So, it’s huge.
ROBERT L. FITZPATRICK: But its footprint is larger than the dollars because the dollars are accounted for only in terms of purchases. But people will often put off college, quit jobs, change their careers and so on as a consequence of the promises that these schemes make to people. So, it has a very powerful impact on people’s social and personal lives — and that isn’t accounted for financially.
CHARLES MIZRAHI: Okay, there’s a dollar cost to this, and then there’s the human cost. And we’ll deal with both today. But first, I just want to get it through what multilevel marketing actually is —which you explain. It’s basically not selling product, but the product is the reason that is used to get more people involved. So, to make money off those sales — off those people.
ROBERT L. FITZPATRICK: It’s often said the real product is the business opportunity. And if you say: “What is the business opportunity?” It’s the opportunity to sell the business opportunity. Again, what opportunity? So, you can see the endless chain and the absence of any underlying value here. It’s valuable if you can sell it to somebody who can sell it, and so on.
CHARLES MIZRAHI: Right, right. So, you don’t care about someone who buys and uses the product. The concern really is you’re trying to sell. You’re not going to make money that way. The game is structured and fixed. So, the person who sells the most people — who gets them in their downline — they’re the ones who are rewarded.
ROBERT L. FITZPATRICK: Precisely. I mean, think about it. In the 21st century, the idea of people selling ordinary cosmetics and beauty supplies or other commodities person to person, on your own, one at a time, in the era of Costco and Amazon … Who would need such a salesperson? And how could they ever make a profit in that way? So, it is called direct selling. There is a product, but that’s not what the business is about.
CHARLES MIZRAHI: You know, you bring up something that you just reminded me of. I have a friend of mine who about 25, 30 years ago, when Amway … They seemed to go in waves. Amway got into our community somehow and they were having meetings and people were giving these cryptic calls like: “Charles, I want you to come over to my house tomorrow night with your wife.” “What’s it about?” “You know, we’ll just talk. It’s a business opportunity.” “What’s the opportunity? Let me know if I’m interested.” “No, we’ll talk face to face.” That was my first red flag. If you can’t tell me on the phone, it’s not a business opportunity. It’s baloney.
CHARLES MIZRAHI: So, anyway, one of my friends was involved with it and they bring another person in to do the sales. I went just out of respect for him and it was a joke. I said, here’s a thing of toothpaste. I know what the markup is. I know what the cost is, more or less. How does everybody make money if the toothpaste cost a dollar? How does everyone make money off this cost of $1? It’s just impossible. It was just a lot of baloney. I just couldn’t understand it from the perspective of — there’s cost of goods and there’s everything else, and now you’re telling me you’re able to sell this for a little more than the store and everybody makes a profit?
ROBERT L. FITZPATRICK: Yeah, your experience is classic, actually. First, the business was based upon leveraging a relationship, so there’s the first violation there. You know, generally most people are very careful to keep social relations protected from commercial exploitation and commercial influence.
CHARLES MIZRAHI: Don’t go into business with your friends, right? It never works out.
ROBERT L. FITZPATRICK: I mean, this is an ancient practice and wisdom that was violated right from the beginning. Then the person didn’t tell you what it was all about. That’s a withhold that is also violation of trust. And then when you arrive, you had the knowledge to actually ask critical questions that would be normal and due diligence, and they really can’t answer them. So, you see that there’s really no business substance there, but there is a very clever and scripted and very powerful method that has been developed for drawing people in and leveraging personal contacts, personal relationships, family relationships and so on. And that is really the way this spreads — is virally. There’s nothing there underneath in the way of an actual business until you strip away the whole talk about selling and look at the recruiting model. And there is, in fact, a program there that is crafted and has been crafted over the years to benefit a very small number of people at the direct cost of everybody else.
CHARLES MIZRAHI: There are so many red flags that start off with: “Let me talk to you about the business opportunity.” They can’t tell you on the phone. You go into their home, you’re met with someone more experienced who never answers any questions directly, but sells a dream. I said: “I’m not going to go ahead and introduce you to every person I know to sell them a bar of soap.” “Well, if you see a movie and you like the movie and you tell people, it’s advertising it.” It doesn’t make any sense to me. So, all of these things to me were red flags.
CHARLES MIZRAHI: But tens of billions of dollars are lost each and every year. And I think you wrote in the book was 5 million people or so — maybe even more — each year, new people go through this and are recruited. So, my question is, what’s the allure? Why does a sophisticated person — not sophisticated, let me just back up. Why does a person, who wouldn’t do stupid things in business, who has somewhat of an education, who has some means — they’re not welfare people. How does the dynamics work, that someone who you would think would never be snookered into something like this gets sucked right in, and falls for it hook, line and sinker?
ROBERT L. FITZPATRICK: Yeah, that’s probably the most important question and goes to the heart of this thing. And the answer to that is pretty disturbing, I think, to many people. Because it reveals something about the nature of our economy and our culture right now. But first of all, the promise, the claim that is made can be absolutely electrifying. It does not begin by answering questions like you asked — the due diligence questions. How does the model work? Where are the margins? It doesn’t begin that way. Normally, the scripted solicitation begins by asking the person: “What do you want in life? What are you looking for? And why have you not achieved what you wanted to achieve in your life? Where are your areas of disappointment and resignation and so on?”
ROBERT L. FITZPATRICK: And it unlocks in many people a torrent of what has become now, for many people, tremendous frustration at the ability to move their lives forward. Since the seventies — at least — millions of people have felt frustrated from social mobility. College is becoming out of reach. Homeownership is, and they see their incomes kind of sliding backwards. This has gotten worse and worse as time went on. So, there is an enormous pent up frustration. Yet there is also still great faith in the American dream. Most people honestly are losing that faith in the conventional economy. Multilevel marketing comes along and says: “That faith is warranted and you can still gain all these things. But this is the model that you now need to pursue.”
ROBERT L. FITZPATRICK: Now, if you have bought into the idea of that narrative — about dreams becoming fulfilled — without either the experience or the knowledge, or they have successfully diverted you from the critical due diligence questions, you can be pulled into this very readily. It unleashes in people a torrent of hope and desire for things — not greed. I’m talking about normal expectations of things that they would love to achieve in their life and are not really meeting those expectations. Now, that does all sound like a classic too good to be true — except this proposition has behind it the endorsement of the U.S. Federal Trade Commission, the U.S. Chamber of Commerce, a 46-member caucus in the U.S. Congress, the Department of State and the Department of Commerce. On top of that, Wall Street — major institutions — invest in it. And then, of course, we have major media that for years and years told stories about all the success people are enjoying — without doing any investigation into the losses that millions and millions were suffering.
ROBERT L. FITZPATRICK: So, the average person who is solicited today can be overwhelmed by these endorsements, can be manipulated by these very scripted solicitations that attempt to get inside your soul and divert you from doing normal due diligence. Also, bear in mind, Charles, most people have never been in business. They’ve never owned their own business. They don’t know about costs and profit margins and things like that. So, they don’t really know how to scrutinize such an invitation. So, to them, it may not sound too good to be true. It just sounds like maybe this is the opportunity that’s come knocking.
CHARLES MIZRAHI: Right, and it’s a low-dollar cost entry, right? Usually they suck you in for a very low amount of money. And the promises, the effort and time and labor you put in will be rewarded exponentially. So, who wouldn’t want to do that?
ROBERT L. FITZPATRICK: The exponential math element of it is a very curious thing because very few people — really, for most people, this exponential math is a kind of blind spot in our education, I would say. Because many people don’t understand it. I use examples like if I gave you a choice here — I can give you $1 million today, right now in your hand, or I’ll give you one penny today and we’ll just double the penny just for 30 days. Day one, you have a penny. Day two, you have two pennies, and day three you have four pennies. We get 26 more days, or you can take the million now.
CHARLES MIZRAHI: By day 20, it’s going to be a lot of fun.
ROBERT L. FITZPATRICK: It’s almost $5 million you would have on the 30th day. It seems counterintuitive, and so most people don’t really grasp when they say: “Just recruit five people, and they’ll recruit 25 people, and they’ll recruit 125.” You’ve already got over 150 people in your downline. Sounds kind of feasible.
CHARLES MIZRAHI: Let me interrupt you for a second, please. Out of those … So, if I just recommend my five friends and they recommend five friends each, that’s not that hard, right? They see ten, they get only five, that’s 25. And just keep replicating this. I’m going to make — because I’m on top here of this pyramid —I’m going to make money on — let’s say it was a third level — 150 people every time they sell a tube of toothpaste, cosmetics…
ROBERT L. FITZPATRICK: Every time they buy!
CHARLES MIZRAHI: Every time they buy, I should say, you’re right.
ROBERT L. FITZPATRICK: They don’t have to sell it.
CHARLES MIZRAHI: You’re right. Good distinction. We’ll definitely touch on that. This is the more you buy, the more … It’s ridiculous. Okay. You know, it’s like you’re going to Costco and the way Costco makes money is they keep buying their own goods. You go to cash register and they don’t sell anything.
ROBERT L. FITZPATRICK: That’s right. They’re their own customer.
CHARLES MIZRAHI: So, you have this pool of 150 people under you. You’re getting your percentage on all revenue generated from that, from all those levels. And it’s extremely enticing. But as you mentioned in your book, you get down to the 13th level — so those five get five, and those get five and keep going. How many people does that come out to, only 13 levels down?
ROBERT L. FITZPATRICK: Yeah, 13 below the first or second level, you would exceed the population of the earth. You’d be coming up over 7 billion people.
CHARLES MIZRAHI: 7 billion people selling your product.
ROBERT L. FITZPATRICK: That’s exponential math. Of course, you don’t have to go that far, because the chain will break very quickly. The people you know, are people they know, too. So, you know, there’s an interchange and getting that many people to buy into your scheme is not that easy and so on. So, the chains don’t really … But the point is the proposition is an absurd proposition on its face. If it should work for you, to go 5, 25 or 125 … It should work for 125, right? So, it should absolutely consume the whole earth.
CHARLES MIZRAHI: In a heartbeat.
ROBERT L. FITZPATRICK: It were possible. But of course, it doesn’t.
CHARLES MIZRAHI: Now, you brought up something which I was totally wrong about. And that’s the nuance. That’s — the way I see it — the game changer, where this all falls to pieces, if you know what you’re looking for. I said everything they sell — in terms of the product. You correctly pointed out that it’s not what they sell, it’s what they buy. Could you explain to me the distinction between the two? And how multilevel marketing works on the person in your downline buying stuff, where people have garages full of this stuff that they’ll never sell, but they keep buying it to be their own best customer.
ROBERT L. FITZPATRICK: Yes. So, the question I’m so often asked, in fact, you asked it to define multilevel marketing. Sometimes I’m asked to distinguish it from a pyramid scheme. And to define it, I try to describe the four main components of it. The first one we already covered: the so-called “endless chain,” which of course, is an illusion. Nothing is an endless chain, especially in business. And maybe in religion you can have such an idea of infinite — but not in business. So, the second one, though, is called “pay to play.” This is critical, because if it is an absurdity that I would go out on my own, from my house, and begin selling a skin cream to my friends … I can’t do that, really. I might lean on a few, but after that, I’m not going to get very far. So really what I’m doing is selling the proposition now of the endless chain.
ROBERT L. FITZPATRICK: So where does the money come from then? If really selling is not where I’m going to make money, where does the money come from? Well, it comes from the chain itself — inside the chain. Every MLM has what they call “purchase quotas.” So, for you to get in on this amazing opportunity based upon this genealogy of people that are going to join up, you have to maintain a certain level of volume. The easiest way to maintain that volume is you buy it yourself. Every month, sign up on an auto order, it comes into your house, and so now you’re qualified. If I recruit you and four others, I’ll get the override. And you recruit, as long as you’re buying.
ROBERT L. FITZPATRICK: So, every person has this inducement or conscription to make purchases, not because they’re going to be able to resell them, but because they qualify you for the money to be gained through the recruiting process. That’s where the money comes from.
CHARLES MIZRAHI: Let me just make sure I got this right. If I buy $1,000 worth of product that will entitle me to make X dollars on everyone who buys under me. If I only buy $22 worth, I only get a partial amount, which is considerably smaller.
ROBERT L. FITZPATRICK: Or none.
CHARLES MIZRAHI: Or none. So therefore, for me to maintain my big dream of making a certain percentage on everyone in my downline, I need to maintain a certain level of volume. And if I don’t, my thinking is: “Gosh, I’ll get these people anyway. But if I don’t put the money up and buy this stuff, I’m going to get real sick seeing my 20 people in my downline make a zillion dollars and I won’t be able to make any money on that because I was too cheap.”
ROBERT L. FITZPATRICK: Exactly. And that’s it. So, there’s the requirement, but also the inducement, because if you stop buying, you’re going to lose everything. You’ll no longer qualify. So, if you have gone to all that trouble and you’ve recruited and leaned on your friends, and then they did that, and you’ve got a bit of a downline built up now, you’d better keep maintaining your purchases. And they must also for the same reasons. So that’s how the system generates cash without a product demand. There’s no demand for that product. And it doesn’t matter what competitive similar products sell for because that’s not why I’m really buying it. I didn’t go out and price shop it. So, it doesn’t need a consumer market. It doesn’t need a demand and it is not sensitive to price competition. So, it has created its own artificial market.
ROBERT L. FITZPATRICK: Yeah, it will report to Wall Street or to the SCC or to the bank: “We made X amount of sales.” Sounds great. We call ourselves direct selling, but this isn’t sales based on markets. This is a sales based on a false financial promise. And that’s where I think multilevel marketing should be completely distinguished and separated from — it has very little to do with the products themselves and people. Some of these products are fruit juices, powders. I mean, they’re things that you could get anywhere.
CHARLES MIZRAHI: But as you mentioned, the product is not the story, right?
ROBERT L. FITZPATRICK: The product is not the story.
CHARLES MIZRAHI: It could be anything. And in order to give us an exercise when you go through the third or fourth step, and we’ll replace it with something else. But I just want to do this as a demonstration. It could literally, folks, be any product. It doesn’t matter because the product’s really the reason that they can stay in business doing this. Because if you don’t have the product, then you’re really in trouble. Then you’re a pyramid scheme according to the eyes of the government, from what I understand. So, you put the product in there.
CHARLES MIZRAHI: It’s like a few years ago, I think it was eBay had a ban on reselling tickets — sporting event tickets for a baseball game or something. So, you couldn’t do a certain markup. So, the thing was, I have two tickets to the to the Knicks game courtside for free — but the Knicks hat cost $2,000. So, you were buying the hat in order to get the tickets. But we all knew that was a sham. This really, the product or whatever the service or product is, is just a reason for it to be in existence. It’s not the main thing that is being sold here. It’s the dream. Fair?
ROBERT L. FITZPATRICK: Yes, that’s well said. The product is a mechanism — a vehicle — for transferring the money — it’s buy-sell transactions. That’s how the money is moved. In India recently, last month, the equivalent to the United States financial crimes enforcement agency has prosecuted the Amway Corporation of money laundering. Now, they’re not saying Amway is engaged in some nefarious secret business. What they’re saying is that what you’ve really done is sold a pyramid scheme. This is what the complaint is that was registered. And you’ve laundered the money through commissions and profits. The profits come out of India, go to the United States. They were laundered as if they had been part of a direct selling business, but that was only a front for what was really a pyramid recruiting scheme. That’s the accusation. And that’s, I think, an apt description of what we’re talking about here in relation to the product — to the actual enterprise itself — is that the product is a mechanism for executing this recruiting scheme. Instead of just handing money back and forth, there’s a product as an intermediary, you might call it.
CHARLES MIZRAHI: Right. Okay. So, you mentioned two pillars. You said there was a third one and a fourth one. What’s the third? You have “pay to play,” what’s the next one?
ROBERT L. FITZPATRICK: Yeah. So, the first one was “the endless chain,” which is unique. No other business on earth would ever say: “Our market is infinite and we can have as many salespeople in Chicago as possible. There is no limit to the number of salespeople we’re going to put in South Chicago.” No company would ever say such a thing, but they do in multi-level marketing. Second one was the “pay to play,” which creates an internal revenue stream. And the third one is a “recruiting mandate.” That is, even though it’s called direct selling, you don’t make money unless you recruit people. How do you recruit people? Well, you recruit people by telling them that they will recruit, too. So, I called it a “recruiting mandate.”
ROBERT L. FITZPATRICK: So, again, if you’re a sales person for a real company, they don’t tell you: “For you to make money, you have to go out and find some more people to sell this product for us.” Of course not. You’d be creating your own competitor. So, but in multilevel marketing, that is one of the four essential components that make up what multilevel marketing is: an endless chain, in which you pay to get on it, and keep paying through monthly purchases and fees and other things. And then for you to generate money for yourself and for the company, you recruit other people into it who must do the same. And again, this is a unique characteristic of MLM, and it’s the one most people encounter. You were being recruited. That friend that invited you over that night, he didn’t just want to sell you the product. He wanted to sell you the opportunity.
CHARLES MIZRAHI: So, what I told my friend was: “I tell you what, I’ll buy all the toothpaste.” And I told my wife: “From now on, we buy toothpaste, soap and whatever stuff they sold from this guy.” He goes: “No, that’s not it.” I go: “Then what is it? I’m not going to use my phone book to call every Tom, Dick and Harry I know and tell them to buy soap for me.”
ROBERT L. FITZPATRICK: That’s what he wanted you to.
CHARLES MIZRAHI: Yeah, and I said: “I’ll buy the product.” But the product … First of all, they spent like 10 minutes telling me how great the product is, how it’s equivalent or better than. So, I said: “Okay, I’ll buy the product, I’ll be a user, but I’m not going to be a seller.” Wasn’t interested. All right. So that was the third. You have endless chain. You have pay to play.
ROBERT L. FITZPATRICK: And a recruiting mandate.
CHARLES MIZRAHI: And the fourth?
ROBERT L. FITZPATRICK: The fourth is the one that few people grasp. And it is the math formula behind this that’s — again, remember, each of these components work together. You know, the endless chain allows the promise of unlimited income. That’s the electrifying promise. The pay to play creates the revenue now, where the money will be transferred. The recruiting mandate is, in effect, the mechanism for expanding this thing and for drawing in more money. The fourth element is called an “extreme money transfer.”
ROBERT L. FITZPATRICK: And again, for people who’ve never been in business or in sales, which many people have never been in sales, you would not really understand this, even if it’s sort of said to you. But basically, it comes down to this: In a normal sales company, in a normal sales transaction, there’s a commission when the sale is made. And the person that makes that sale gets the commission, but they may have a manager or maybe a manager as a manager, and they will get a small cut out of that transaction, too. But the majority of that money is going to go to the person that made that sale. And they would have to in order for them to be able to make this profitable. And they added the most value.
ROBERT L. FITZPATRICK: In multilevel marketing, it is the opposite. The person that recruits you gets the least amount of the total commission that will come out of that transaction. The majority of the commission so called — which is a roughly 40% of whatever is paid — is going to go up line and the majority of it is going to go to the top of the chain. So, I have examined scores of these companies in the various court cases that I’ve been involved in and just for consumer education purposes and helping with media. And it always works out that at least 50 or more percent of the commission on all transactions go to the top 1%, who are light years away from the sale. They may be in another continent — they are usually in another continent. And there’s a little bit that’s trickled down to the people in between. And the person at the end doesn’t get enough to make that transaction really useful or profitable. So, you can see that it’s elegantly designed to reward the recruiter. The top recruiters, the ones who are orchestrating the recruiting…
CHARLES MIZRAHI: Really the top recruiters, I would just qualify that by saying the people who started this. Because once you go a generation or two away, you’re done. You’re talking about thousands of people. If you and I on this podcast now, we’re going to start the FitzPatrick-Mizrahi MLM and we’re going to sell these books as a multilevel market. We just follow this playbook and we’ll be able to replicate a lot of the success that these MLMs have in terms of the money they make. Is that more or less fair?
ROBERT L. FITZPATRICK: Absolutely. In fact, multilevel marketing not only is based on endless expansion, but the business itself endlessly expands. The very first MLM produced Amway. The first MLM was called Neutrilite. Amway was made up of two guys who worked for ten years at Neutrilite — which is the first MLM. They learned the whole model and then they went and duplicated it. And from there, Amway has become the grandparent of hundreds of others. And they all follow the same script. They use the same pay plan, more or less.
CHARLES MIZRAHI: Let me interrupt you. Let’s say we have an MLM guy here and they’ve been in and they’ve been working this for the past five years or so and they say: “You know what, you’re just a washed-up old guy who’s just cranky because you never made money.” I want to tell you, I was at a convention. They had a thousand people in the room and they gave 50 people beautiful Mercedes Benz and another people bought their own island. Another group put their kids through college and bought Rolex watches and they gave away gifts and they gave away all this. And I heard someone on stage for about a half hour talk about people like you “who were going to destroy my dream,” because I’m looking around, everyone around me is making money. What do you say to those people?
ROBERT L. FITZPATRICK: Well…
CHARLES MIZRAHI: Who are those people? Are they real? What game are they playing at this point?
ROBERT L. FITZPATRICK: There are a few, Charles, that are real. There are some that are. Someone just sent me a notice — from Charlotte, North Carolina, where I’m originally from — of a sale of a house recently. 24,000 square foot house that was built by an Amway distributor some years ago. And 24,000 square foot … At that time, there was no other house in that area of that scale. And the real estate people said: “We don’t have a word for this.”
CHARLES MIZRAHI: That’s a warehouse.
ROBERT L. FITZPATRICK: Yeah, what is this thing? And it looked like something that would make the Downton Abbey look like nothing. So, some people are making vast amounts of money. And the companies themselves, the owners, are making ungodly amounts of money. And so, there is real money. If all of these people are losing, the money is going somewhere. And it’s elegantly designed to concentrate it and send it to a very few people at the top.
ROBERT L. FITZPATRICK: However, these events are staged scams, honestly. I have personally talked to many people who were speakers at these schemes — at these events — and a couple have written books about this. They weren’t making any money at all. They were maybe making $30,000 or $40,000. And after expenses, they were making nothing. They were on the stage hyping this up, talking about how wonderful it is. People came up and asked for their autographs thinking they were millionaires. So, a lot of it is pure hot air. It is just hype. And it is false, too. And it is just marketing. There is no substance there. What they’re really saying is that anybody could do it, could possibly do it.
ROBERT L. FITZPATRICK: And so, from there now it just gets stretched out into: “Well, what did you do?” “Well, I’m not making it now, but I’m going to. I’m on my way”. And so pretty soon, instead of saying I haven’t made it yet, but I’m on my way, they just say: “I’ve made it.” So, there’s a lot of false testimony at these events. And overall, the message, of course, is utterly false. Because if you need a thousand people underneath you, then it takes a thousand people to lose for you to be profitable. Well, who’s going to buy into a program that only 1 in 1,000 make money in? But that’s really the truth of it.
CHARLES MIZRAHI: So, we have a lot of psychological factors at play. Once they get you in there playing with your emotions, it’s not a business deal anymore. It’s the weaknesses in your life and your aspirations and your dreams and your goals that are really preyed upon. They’re really preyed upon. They’re dangled. You don’t want it, you don’t want to supply for family, got that. Then when you buy into it, literally buy into it, already there’s some costs. I already invested this much and I already have ten people signed up. If I don’t keep going, I’m going to lose everything.
CHARLES MIZRAHI: So that’s where you have these — from what I was reading in your book — garages filled with stuff in order to keep it going. Then once you get that, your life becomes an endless prospecting game where every person who has a pulse now becomes a mark. They become that. And then at the end, you work. Your tail off, you do everything. You follow the manual, you go to the meetings, you listen to your upline, downline. You do everything right. And you still don’t. So, you start to think it’s not them, it’s me. I’m screwing up here. And you have a lot of people who feel like failures, become despondent, depressed, that it’s not the system that’s rigged, it’s their lack of effort.
ROBERT L. FITZPATRICK: Well, I would say it’s probably normal when we don’t achieve success to think about our own failings. You know, that’s normal anyway. But in this scheme, the idea that “you were the screw up, it was your fault” is said to you powerfully, emphatically, right from the start. We have the greatest opportunity in the world. This is the American dream fulfilled. This is it. And corporate America is gone. The government, you can’t count on that. The doors are closing. But multilevel marketing, this company, is going to fulfill your promise. There’s only one way that this wouldn’t work for you. And that would be you.
CHARLES MIZRAHI: “You’re the weak link here.” And by the way, sorry to interrupt you. You know, it’s so powerful when you hear a speaker — which I didn’t know that they’re scammers standing on stage — you see them and all stories sound alike. “I was on welfare. I was living in a box on the corner of 42nd Street in Times Square. I was getting one meal a week. I had nothing. My kids left me all of that. And I built my zillions.” And they’ll show you a house or a car that they’re driving and you see other people around at this convention getting all these amazing gifts. So you must start thinking: “It’s not the system. It’s got to be me. I got to work harder or do more.”
ROBERT L. FITZPATRICK: And that’s part of the whole pitch. Because, remember, they’re going to lose. The data is very well established. You don’t have to go wonder about this. I mean, it’s been established in court cases and lawsuits and it’s very clear. And the model itself, you don’t even have to go look at data. It can only support a tiny number of so-called winners on the backs of those losers. That’s the model of it. So, the whole narrative is a false narrative that anybody can do it. Of course, not everybody could do it. But think of a plan in which I’m going to scam not just you and a few others, I’m going to scam millions over a long period of time. I better have a great way to do this. So, it takes you out of the realm of just flimflam and into the realm of very sophisticated propaganda, manipulation and mind control. A kind of cult-ism here develops. I have to get you to believe — not just believe me, I have to get you to have faith in this model. So people do, they embrace this. They become believers. They become adherents, they become proselytizers.
CHARLES MIZRAHI: They become zealots.
ROBERT L. FITZPATRICK: And become zealots. And so now, when they fail, they take it all upon themselves, that they sinned, in effect. And they’re going to hell — which is the world of mediocrity, of losers, the realm of the losers. That’s what’s going to happen to them now. And that’s what they’re told day after day — that if you ever quit, your life, your family and your kids are not going to really amount to much as a result of that. So, I’ve seen this where a person wants to quit and they go to the upline and they say: “I really thought more of you than this. I thought you cared more about your kids than to just walk away from this opportunity.” That’s rough, isn’t it?
CHARLES MIZRAHI: Yeah, that kind of sucks.
ROBERT L. FITZPATRICK: That’s normal. That is part of this narrative. So yeah, it can absolutely destroy people. And I have seen people just out of their losses from it. It’s not just financial. They can’t work anymore. They go into a despondency, self-blame. I’ve seen marriages destroyed from this, as you can imagine when this kind of voice and influence enters into your life.
CHARLES MIZRAHI: This is this model that has been working for the past 40 years. One thing that I’ve heard of a couple of years ago — I forgot which company it was — was that: “Well, we’re different. We’re a different MLM.” Is there such a thing?
ROBERT L. FITZPATRICK: No, there is not. However, that story has become quite common in the MLM world. Over time, as these schemes proliferated, a body of experience began to grow in the country and voices began to be raised. I will say that for many years it was very difficult to raise a voice of criticism, of analysis. These companies were litigious. They claimed you were interfering with them. You were slandering them, and so on. And the media was relatively dormant on it. So the average person really could not get much information on it.
ROBERT L. FITZPATRICK: But the information is out there now. In order to combat it, these schemes now say: “Okay, yes, that one — agree, that one’s a scam.” Some of them even say: “Multilevel marketing is a scam, but we’re not multilevel marketing.” And then you look at it and there’s the four elements all there again — still the endless chain, still the payments and the quotas, still you’ve got to recruit. They’ve got the same lawyers, they use the same software. Even the leaders came from another MLM, that they say now they are not MLM. So yes, this is a common diversionary narrative that’s out there as a result of a growing consumer awareness.
CHARLES MIZRAHI: Because now with YouTube and with Twitter, back in the day, you might have been doing this and feel like the only failure in town. But now you just go online. You could see “life destroyed by MLM” and there’s a zillion videos.
ROBERT L. FITZPATRICK: That’s right. There’s a whole Reddit community — subreddit community — now over 700,000 people. I sent you some links to some media that is again, very new. For so long there was just nothing in the media about this. But now you’ve got the John Oliver Show. You’ve had a Showtime series in which MLM was the prominent factor in the story. It fits into a lot of comedy stories now. And so the truth of it, the reality is they said it’s touched virtually every American household. Yet Kramer on Seinfeld should have gotten in an MLM, but he never did.
CHARLES MIZRAHI: I remember there was an “It’s Always Sunny in Philadelphia…”
ROBERT L. FITZPATRICK: And Kevin James did get in one and “King of Queens.” So that’s how it’s changed.
CHARLES MIZRAHI: In “It’s Always Sunny in Philadelphia,” they had a “you got got.” You know, a whole thing and it’s selling … It’s hysterical.
ROBERT L. FITZPATRICK: It’s starting to get out there now.
CHARLES MIZRAHI: So, I just did a search online and I typed in “MLM companies that are public” and it takes me to the Nasdaq site and there’s an article by you. And the title of the article is “Wall Street Still Confused About Multi-Level Marketing But Starting To Hedge Bets.” So now there is a list here of multilevel marketing, which I’m sure people would have no idea that they were multilevel marketing. The top of the list — this is by market cap — the first one you have here listed is Avon. Avon? That sweet lady ringing the doorbell in my neighborhood, selling my mother some cosmetics? You’ve got to be wrong on that.
ROBERT L. FITZPATRICK: Well, actually, that article is a few years old. Right. And at that time, Avon was indeed multilevel marketing. Avon didn’t used to be the sweet lady that came to your door — the Avon lady — or to your family’s in the past. That’s kind of all gone. You know, Avon switched over to multilevel marketing around 2005. In 2008, Avon ran the largest ad in its history during the American Super Bowl game. And in that ad, they never mentioned an Avon product. The entire ad was about recruiting sales reps. So, they had flipped from selling lipstick to selling income opportunity. And so Avon, by the way, since then, has declined massively. It has been purchased by a Brazilian multilevel marketing company now. So, others are the others on the list. You know, go down from there…
CHARLES MIZRAHI: We’ll go on. Here we have Nu Skin. What do they sell? Or what’s their opportunity?
ROBERT L. FITZPATRICK: They all sell the same opportunity. But the product is a cosmetic skin care type of — as they say, “pills, potions and lotions.”
CHARLES MIZRAHI: Okay, Herbalife. That’s what, pills and shakes?
ROBERT L. FITZPATRICK: Weight loss powder or weight gain powder or weight maintenance powder — it’s the same powder. But whatever you need, that powder works according to Herbalife.
CHARLES MIZRAHI: USANA.
ROBERT L. FITZPATRICK: USANA is also skin, vitamins, supplements, that sort of thing. Cosmetics and food supplements and skincare stuff account for a massive amount of it.
CHARLES MIZRAHI: Tupperware. My mother had a Tupperware party in 1970s. I remember I put out the potato chips. And these ladies sat there and they talked and they did a burpee thing. They loved it. We grew up on Tupperware. Tupperware!?
ROBERT L. FITZPATRICK: Yeah. And again, this is Tupperware from the past. Tupperware was a very product-oriented party-plan business, had a unique product at the time. You know, it’s almost become like a word like Xerox — put it in a Tupperware. But millions of companies make that now. They have changed dramatically. They have declined. A couple of companies like Tupperware and Avon that have roots in real direct selling in the past have not done well as multi-level marketing has boomed. Their kind of business, they have tried to cling to the retail side of that business to their detriment. And now if you look, you’ll see that Tupperware share value is down about 90%.
CHARLES MIZRAHI: So, you made a good point. And I just want to make this distinction. There’s a difference between direct selling — which Tupperware and Avon used to be — and there is multilevel marketing. And the difference is — and just tell me if I got this right — the difference between selling a product versus selling a business opportunity. Is that the main distinction?
ROBERT L. FITZPATRICK: Maybe go a little further for that to make real good sense: the business opportunity that can be resold infinitely. So, people do sell business opportunities — franchises, for example. But I can’t sell a hundred franchises in the same neighborhood. That’s against the law. I have to disclose to the franchisee how many there are, and I have to disclose a lot of other information — what their turnover is and their margins and so on. But the first distinction is correct. Direct selling is about one at a time, personal, direct retail selling.
CHARLES MIZRAHI: By the way, that was Fuller Brush also. So we had a Fuller Brush guy come to the neighborhood.
ROBERT L. FITZPATRICK: Exactly. Fuller Brush is the classic door-to-door selling. I have quite a bit in my book about the history of Fuller Brush. It was grueling work and nobody ever got up on a stage and said: “I became a millionaire as a Fuller Brush man.”
CHARLES MIZRAHI: My mother loved the product, she said the products are really good.
ROBERT L. FITZPATRICK: Yeah, and my mother did too, as a matter of fact. And I recall that also. But a Fuller Brush person did not recruit other Fuller Brush people.
CHARLES MIZRAHI: They were just trying to sell.
ROBERT L. FITZPATRICK: They went out and sold. They had a route, they had a territory and they had to work like hell to do that. And the average sale was a few bucks, as it turns out.
CHARLES MIZRAHI: So those were really peddlers, modern day peddlers. Instead of a pushcart, they walked door to door with a valise or sample case.
ROBERT L. FITZPATRICK: And that model is, let’s say, today, still revered in our lore. The idea that you can always go out there and sell something. And so multilevel marketing, let’s say, stole that identity — which is still a revered identity, but it does not resemble it. What you just described, that’s direct selling. Multilevel marketing is an endless chain recruiting scheme. It’s a pyramid recruiting scheme and it’s a money transfer scheme. And the product, as you described, is the opportunity to recruit.
CHARLES MIZRAHI: Okay, so something like World Book Encyclopedia — that was direct selling.
ROBERT L. FITZPATRICK: Direct selling. Encyclopedia Britannica as well.
CHARLES MIZRAHI: Because you had to go door to door to sell encyclopedias, selling Bibles. All those things were the end product. You had to move product. And you had to move it and you got compensated as a percentage of the sale. So there was a simple thing. Pampered Chef, one of Warren Buffett’s Berkshire Hathaway companies that was, what is called a party plan?
ROBERT L. FITZPATRICK: A party plan, yes.
CHARLES MIZRAHI: Explain that to me.
ROBERT L. FITZPATRICK: Well, party plan — it’s still multilevel marketing, actually. Because, you have a product line, you buy the product, you buy a bunch of inventory. Then you organize these little group parties for friends, relatives and so on. They can purchase the product and you get commission when you sell it. Then you try to find somebody in that party to duplicate that party and then to become an agent for you and so on. And again, when these products are new and if they have something truly unique, you could actually make some sustainable money just holding parties. But as the market has so exploded now, it becomes the recruiting scheme again.
ROBERT L. FITZPATRICK: Pampered Chef and other so-called party plans — the real money the only real money is going to be if I can recruit a team. How do I recruit them? Because they’re not going to make it just like I couldn’t make it without a team. They’re going to need a team. So, we’re back into this illusory and deceptive, endless chain proposition that ultimately can only support a tiny few at the cost of the others — who, in futility, go out and try to make it work. But in the end, they’re just feeding the money up.
CHARLES MIZRAHI: So, Robert, this has been extremely enlightening, and I just want you to leave my listeners with this. Give me a few sentences and under 60 seconds … I get a call for a business opportunity. What red flags — regardless of how new it is, regardless of evolutionary, regardless of how it’s not multilevel — what are the few red flags that right off the bat I should hang up the phone or just make sure never to go to these places?
ROBERT L. FITZPATRICK: Well, I think you actually identified them. First is they may not tell you precisely what it’s all about. There’s this first red flag right away. Second, they want you to pay money for something that they couldn’t really fully explain to you. There’s a second red flag. The third is a promise of steady income from doing something that we already know is kind of obsolete in America: selling goods door to door, person to person.
CHARLES MIZRAHI: I want to tell you, I did not think of that. I get so sucked into the whole MLM concept and I’m saying, you know, you brought up a good point. Why the heck would anyone buy anything door to door when you go on Amazon or you go to Costco?
ROBERT L. FITZPATRICK: Yes. Online. Who has time for sales pitches? Who’s at home? Who’s going to let you in the door unless they already know you today? I mean, the whole concept is silly on its face, but as you saw, if I can move around and give you a narrative that this is real, this is important, and I’m leveraging trust. See, that person had a certain cred with you because you knew him. So, if some stranger had come up and told you that story, you would have thrown him out the door in 2 seconds. But if it’s somebody you know…
ROBERT L. FITZPATRICK: And I truthfully think this is another red flag is that friends don’t really commercialize relationships like that. So, the very idea of somebody, a friend or relative, suddenly calling you out of the blue with this business opportunity, that in itself ought to be a red flag as well. At the end of the day, if the word “exciting opportunity, “network marketing,” “multilevel marketing” is involved, look out. Because it is far more than a business sham. It’s a very dangerous, entrapping, cultish movement here in which you can be sucked in. And you could really become dominated and persuaded. Everybody is vulnerable to this.
CHARLES MIZRAHI: You got got you know. That’s true. I just think of every time I’ve ever been offered an opportunity, I always ask: “Why God me? Out of 7.5 billion people, out of all the people, why did you call me?” And usually it’s never a good answer. And I basically hang up the phone. It’s like Warren Buffett said, that if an oil man came from Houston and tried to sell him oil in Nebraska, hold on to your wallet, because everyone in Houston wasn’t buying for him. They know the oil business, why are they coming to me? So, when I get these once in a lifetime opportunities, I count myself extremely lucky and thank them and just say, not for me. It just doesn’t work.
CHARLES MIZRAHI: But look, it has all the psychological triggers. It’s been extremely refined and battle tested, scientifically-vetted process that works on human frailties and human insecurities and the aspirations of people and the goal. So, it’s playing into a very, very soft audience that … Then again, the people who do say: “Yes, I’m interested in meeting,” 90%, you got them, right?
ROBERT L. FITZPATRICK: And then it’s done out in the open, enjoying literally exemption from regulation or oversight makes it appear all the more credible to people. It’s like, well, if this is really a scam, then surely something would have been done. But unfortunately, today, that’s just not a reliable, valid proposition — a mental proposition. Also, I will say there has not been good solid information about this. My book, as I mentioned, is the first one — comprehensive book that traces this thing from the beginning to the end and really goes through it. There just hasn’t been anything like this. And there’s now beginning to be some film documentaries on this that are beginning to come out, and I think there’ll be more coming along. But the public has really been left in the dark here until quite recently.
CHARLES MIZRAHI: And I just want to point out that a site that you’re a part of — and I’ll put it down below in the description — PyramidSchemesAlert.org. Is that a paid organization? How does it work?
ROBERT L. FITZPATRICK: Not at all. It’s been developed over a long period of time with various people that have contributed, made it possible. It’s a public education, consumer education — everything’s free. There’s no advertising on it even. And it has been around for almost 20 years now. PyramidSchemeAlert.org. So, it’s just a public interest, consumer education website that offers some factual, simple information. It’s not selling anything. And it was — when it started, which is in 2000 — one of the only resources out there for people to go and see some valid information. There’s more now, but that’s its purpose.
CHARLES MIZRAHI: And you’re not a lawyer. You don’t make money by representing people who have been screwed by MLM. You don’t make — I don’t know. Do you make any money off of this MLM machine?
ROBERT L. FITZPATRICK: Not off the site, no. Of course, I’m selling a book.
CHARLES MIZRAHI: All right.
ROBERT L. FITZPATRICK: So, there’s a royalty involved in the book. I mentioned that I’ve been in 37 court cases as an expert witness. Now, I’ve also done some consulting for Wall Street analysts — not on who to buy, to sell or anything. But they come to me and say just what you said, Charles: “I see the scheme. It has a market cap of $3 billion. It’s got 3 million people around the world into it. I’ve looked into it. I can’t figure it out. How do they make money? How does this thing work? Is it going to collapse? And why doesn’t the government do something?” So they come to me for that. So I’ve done a fair amount of consulting to financial analysts — Wall Street analysts — on these fundamentals.
CHARLES MIZRAHI: If the multilevel business was wiped off the face of the earth tomorrow, you’d be one of the happiest guys around. And it’s not because you won’t be able to make money as an expert witness, but you would consider a terrible wrong would now be eliminated. Is that fair?
ROBERT L. FITZPATRICK: Yes. I don’t think that I’m particularly unique in this. It did touch something in me I think, seeing this many people manipulated, tricked, deceived and brought into loss and then blaming themselves — that this is done systematically. I think it did trigger something in me years ago that I just didn’t want to stand by and do nothing. It angered me.
CHARLES MIZRAHI: What was your personal journey? Were involved with one? Did you see some of your family, a friend, lose a lot of money and end up really despondent?
ROBERT L. FITZPATRICK: No, my personal experience — as I chronicled in my first book, False Prophets — I was in a pyramid scheme, recruited like millions of other people, or hundreds of thousands in that one, in a scheme that was very related to multilevel marketing — they’re called gifting schemes. It’s essentially the same without a product. So that tells you that these schemes can work, even if they don’t even bother filtering it with a product, or disguising it with a product. But they’re now called gifting schemes. Tens of thousands of people in my area — in South Florida, where I live, this was in the late eighties — got involved, as I did, invited by friends. It created a mass mania. It transformed people. It caused a kind of madness.
CHARLES MIZRAHI: What actually is a gifting scheme? I don’t even know what that is.
ROBERT L. FITZPATRICK: So, a gifting scheme is — instead of my buying $1,000 worth of inventory, of soap or something like that, and then recruiting you to do the same — we’re told that this is a network for sharing wealth and that you put in money and then there’s a matrix and there’s two, and then four and then eight. And when the last eight come in, they give their money to the first person and then the scheme — you move up to levels till you get there. And these things have been all over the country, Charles. Thirty states in America have prosecuted them. So, they’re still around. I was on NBC Today explaining this. It was on The Oprah Winfrey Show, trying to explain the folly of this, that it’s a scam. But it has a narrative very much like multilevel marketing. “This is networking, noncompetitive, sharing economy,” and so on. It’s all of B.S., because it’s nothing but a pyramid scheme — money transfer, four level, the last level gives the money to the top level…
CHARLES MIZRAHI: How much money did you have to put into this?
ROBERT L. FITZPATRICK: $1,500. And then when you moved up four levels, you could get $12,000.
CHARLES MIZRAHI: So where did you go?
ROBERT L. FITZPATRICK: That was the scheme I was in.
CHARLES MIZRAHI: You put in $1,500. What allured you was $1,500 turns into $12,000. Did you make that $12,000?
ROBERT L. FITZPATRICK: No, I didn’t. But I got part of it. In my case, as I explained in the book, before it collapsed. And so the whole thing crashed in. The reality crashed in on me. How could I have been there? Why didn’t I see it? And look how we behave. We started preying upon — in your words — each other. We commercialized all our relationships. What happened to us? Many of us completely walked away from work and so on, because some people were making $12,000 in two or three days and then doing it again and again. Several people made $100,000. But if you charted it all out, as I did in the book, 90% of the people had to lose.
ROBERT L. FITZPATRICK: So in the end, for all the hype and the craziness and the madness and the frantic recruiting that went on, 90% — nine out of ten people — lost money, andthe other tenth got the money that the others lost. And a few of them who were at the very beginning, they made a boatload of money. So that sort of sparked me to look into this delusional world of pyramid schemes.
CHARLES MIZRAHI: Wow. Folks, the name of the book is Ponzinomics: The Untold Story of Multi-Level Marketing by Robert L. FitzPatrick, available on Amazon. I’ll put a link down below as well as a link to the site PyramidSchemeAlert.org. Robert, God bless you. You’re doing great work, just getting people to stop and think. And if you could save a couple of people from doing something stupid, I think you’ve had a happy day.
ROBERT L. FITZPATRICK: I’m not alone. There’s quite a few other people saying the same thing these days. But yeah, that’s the idea, is to get some truth spread out there.
CHARLES MIZRAHI: All right. Thanks so much for being on the show. I greatly appreciate it.
ROBERT L. FITZPATRICK: Thank you, Charles, for having me on.
CHARLES MIZRAHI: Thanks for listening to this episode of The Charles Mizrahi Show. If you’re a new listener, welcome! If you’ve been listening for a while, we’re glad to have you back. Either way, we’d love to know what you think of the show. Please leave a review if you listen on Apple Podcasts. Reviews make it easier for others to find the show. You can also see the video of the interview on The Charles Mizrahi Show channel on YouTube.
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