Pyramid Insurance

Virginia Sole-Smith’s article on Mary Kay Cosmetics in the August 2012 issue of Harper’s Magazine has brought renewed scrutiny to the company’s multilevel business model, and specifically to whether or not it constitutes a pyramid scheme. By offering commissions to distributors on the purchases of other distributors whom they recruit, Mary Kay ladies create incentives for sales reps to focus on inventory sales to these recruits, rather than on sales to end consumers. Although state and federal laws differ, the distinction between a legitimate business and pyramid scheme hinges on whether these commissions come mainly from retail sales to final consumers or inventory sales to other distributors. Critics of multilevel marketing contend that internal sales drive the industry’s growth, to which advocates often reply: If this is true, why don’t regulators charged with consumer protection intervene?

When class-action attorney Douglas Brooks appeared alongside Sole-Smith on NPR’s On Point last month, he linked regulatory inaction against multilevel marketers to the lobbying efforts of the Direct Selling Association, an industry trade group whose members are known for making contributions to elected officials. The families who control the multibillion-dollar Amway fortune, for example, have been making headlines since the 1980s for their donations to the G.O.P., which included $4 million in 2004 to a 527 supporting George W. Bush’s reelection campaign. This spring, Stephanie Mencimer of Mother Jones detailed Mitt Romney’s multilevel-marketing connections, which included more than $3 million in contributions to a Romney super PAC by executives at Nu Skin Enterprises and Melaleuca. As for Mary Kay, Richard Rogers, the company’s chairman (and Mary Kay Ash’s son), has given more than $300,000 to federal campaigns since 2006, most of it to Republicans, including members of Senate and House committees that oversee the Federal Trade Commission.All federal campaign-finance data was obtained from the Center for Responsive Politics.

Largely overlooked, however, have been efforts by multilevel marketers to ward off scrutiny from state regulators. In many states, the primary responsibility for protecting consumers lies with the office of the attorney general, who can issue cease-and-desist orders, file civil suits, and bring criminal charges against companies that are taking undue advantage of citizens. Many multilevel marketers are familiar with these powers, having been reprimanded for dubious business practices by attorneys general in the past. In 1982, for example, Wisconsin’s AG filed suit against Amway for making deceptive “hypothetical” claims that recruits could earn more than $12,000 a year, a feat less than 1 percent of Wisconsin’s 20,000 Amway distributors actually accomplished. In 1991, after being slapped with a cease-and-desist order for violating Michigan’s anti–pyramid scheme laws, Melaleuca signed an agreement with the state’s attorney general under which it agreed to change its business practices. The following year, Nu Skin accepted similar agreements with five state attorneys general.

Of course, most AGs are as dependent on fundraising as any other elected politician, which offers companies a direct method of communicating with an essential regulator. Consider Mark Shurtleff, the attorney general of Utah, home to more multilevel-marketing companies per capita than any other state. According to data obtained from the state, he has received campaign contributions totaling more than $475,000 from members of the Direct Selling Association since 1999, accounting for 14 percent of his donations from sources other than the state Republican Party.

Unsurprisingly, Shurtleff has been an outspoken supporter of the industry. “If you work hard, you can realize the dream of financial wealth and success,” he told sales reps at a conference in 2004 for USANA Health Sciences, a nutritional-supplement and home-products maker based in Salt Lake City. “There is no greater way to do that than through direct sales, multilevel-marketing programs.” Two years later, he testified before the state assembly on behalf of model legislation crafted by the DSA. The bill passed by an overwhelming margin. Critics like Jon Taylor, a Nu Skin distributor turned consumer advocate who testified against the measure, contend that it essentially replaced Utah’s definition of a pyramid scheme with one that makes pyramid schemes legal as long as they sell a product.

John Swallow, who in June became the Republican Party’s candidate to replace Shurtleff, also enjoys the support of the industry. Of the $680,000 he has raised for his election campaign to date, $114,000 can be traced to Utah-based DSA member companies, their executives, or their spouses.The $114,000 includes $40,000 given to Utah’s Prosperity Foundation PAC. Though the PAC is registered to Shurtleff, it gave $132,000 of the first $220,000 it raised to Swallow at the end of last year and another $10,000 to his primary campaign this year. In a moment of candor with a potential donor this spring, Swallow boasted of his intention to bring the Utah commerce department’s division of consumer protection under the auspices of the attorney general’s office. The division of consumer protection, which is responsible to the governor’s office, currently handles the investigation end of fraud and abuse cases in the state. Its acquisition would make the AG’s office almost solely responsible for protecting Utahans from predatory business practices.

The size of MLM companies’ contributions to candidates for attorney general stands out not only relative to the total amount raised by these politicians, but to the amount the companies donate directly to all political campaigns for state office. Of the $144,000 USANA has given to political causes in the state since the beginning of 2008, almost half went to Shurtleff or Swallow. During that same period, Nu Skin donated just over $190,000 to candidates for state office, of which $82,000 went to the same two men.

A spokesman for USANA didn’t respond to a request for comment about the company’s interest in the attorney general’s office, but a spokeswoman for Nu Skin replied in an email, saying, “Our support for John Swallow, as well as our previous support for Mark Shurtleff, is based on their pro-business and strong consumer advocacy policies. We believe having an open and constructive dialogue with our elected officials provides value to the company as well as the community we work and live in.”

DSA members in Utah aren’t the only ones donating to their home states’ attorneys general.State level data for this section obtained from the National Institute on Money in State Politics. Executives from the multilevel-marketing telecom ACN (formerly American Communications Network) have given $84,550 to North Carolina attorney general Roy Cooper since the run-up to the company’s relocation there in 2008—nearly 85 percent of their total campaign contributions during that period. Two ACN executives, Charles Barker and Robert Stevanovski, tied with a few others as the largest individual donors to Cooper’s 2008 reelection campaign.This figure includes donations by executives’ spouses and members of ACN’s “Circle of Champions.” Much of this money came from employees residing outside North Carolina. Idaho attorney general Lawrence Wasden raised $25,000 of his $182,268 war chest for his 2002 campaign from Idaho-based Melaleuca, making the company his single biggest donor.A year after taking office, minutes of the Idaho state legislature show that Wasden met with a DSA lobbyist to discuss the Association’s model legislation, which became law in Idaho in 2004. And the families controlling the Amway fortune have given more than $145,000 to attorney-general campaigns in Michigan since 1996, including $87,500 to current AG Bill Schuette. All together, Amway donations were among the largest sources of funding for Schuette’s 2010 campaign.Figures include a $34,000 donation given to Schuette by the Great Lakes Education Project, a PAC controlled by Amway heirs Betsy and Dick DeVos.

It’s no coincidence that DSA members are particularly concerned with attorney-general races in their home states, given the broad powers these offices have to police companies operating within their borders. “If Michigan says, ‘You can’t operate here,’ ” Brooks explains, referring to the 1991 cease-and-desist order issued by Michigan’s AG against Melaleuca, “[they] can continue to operate in the forty-nine other states. If Idaho says you can’t, that’s shutting them down, in effect.”

Currying the favor of your home state’s attorney general can have other perks as well, enhancing the company’s reputation with consumers and regulators in other states. “We are constantly receiving emails and requests to go after and investigate many companies,” Shurtleff told the convention of USANA distributors in 2004. “With USANA, as it stands today . . . all we have to do is write back and say, ‘They’ve been looked at, and they’re a great company.’ ” The attorney-general’s offices of North Carolina and Utah acknowledged to me that regulators sometimes reach out to one another when they receive complaints about a company based outside the state. “We’re all kind of working together,” said a spokesman for Shurtleff’s office. “Hopefully, for truth, justice, and the American Way.”