Robert FitzPatrick on the state of MLMs, post Herbalife battle

Robert FitzPatrick’s first introduction to pyramid schemes came innocently, 30 years ago, when a NewAge group he had been introduced to known as “The Airplane Game” that had been described to him as “a financial system based on sharing rather than competition” was suddenly shut down by the local sheriff’s office in Florida for being a pyramid. A former Alinsky-trained community organizer, FitzPatrick began looking into the matter and learned about a similar, but much, bigger phenomenon that preyed on the same “dreams and beliefs”: the multilevel marketing industry.

IMG_3475Since then, FitzPatrick has become a leading expert on MLMs and pyramid schemes and runs a blog called “Pyramid Scheme Alert.” In addition to educating the public, serving as an expert witness in lawsuits and consulting with government officials in the U.S. (and even China), FitzPatrick also consults investors looking at MLMs–companies where individuals sell a variety of products from vitamins to diet shakes to leggings by recruiting a network of people below them to do the same thing. By the MLMs’ own disclosures, few profit and a debate still rages whether it’s a product or a business opportunity that is being sold. Regardless, MLMs have become multi-billion dollar companies that are publicly traded and have garnered significant investor interest.

MLMs became big news in 2012, when well-known hedge fund manager Bill Ackman, CEO of Pershing Square Capital Management, started what turned into a five-year battle against Herbalife, one of the biggest MLMs, which he claimed was a pyramid scheme, betting $1 billion against it. Ackman’s battle led to a Federal Trade Commission investigation and settlement that forced Herbalife to pay $200 million, restructure its business, quit deceiving people and put its business under a federal monitor.

Since then, however, Herbalife’s shares rebounded, as have other publicly traded MLMs. Earlier this year, Ackman covered his short at a loss. At the same time, the U.S. industry has fallen in both sales and recruits. In 2017, 18.6 million people joined an MLM, according to the industry’s lobbying group, the Direct Selling Association. That’s down 10 percent down from a peak of 20.5 million in 2016—the year of Herbalife’s settlement with the FTC.

I interviewed FitzPatrick for my monthly column for Worth magazine. Here it is:


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