REGULATORY CAPTURE – The FTC’s Flawed Business Opportunity Rule Compiled by Jon M. Taylor, MBA, Ph.D. Consumer Awareness Institute This revealing report demonstrates the need for public officials who can stand up against powerful special interests. You will discover how the DSA (Direct Selling Association) lobby helped the MLM (multi-level marketing) industry gain an exemption from the FTC’s (Federal Trade Commission’s) Business Opportunity Rule, leaving consumers unprotected from the most unfair and deceptive of business practices, proving the need for a firewall between regulators and those they regulate – and for public officials with the skill, the will, and the resources to stand up to powerful special interests. 2 © 2014, 2013, 2012 Jon M. Taylor (Revised August 2014) Printed in the USA How to obtain copies: Copies can be downloaded from our web site at – www.mlm-thetruth.com. For hard copies, contact Jon Taylor directly: Email – [email protected] Telephone – (801) 298-2425 Legal disclaimer These opinions, calculations, analyses, and reports are intended purely to communicate information in accordance with the right of free speech. They do not constitute legal or tax advice. Anyone seeking such advice should consult a competent professional who has expertise on endless chain or pyramid selling schemes. Readers are invited to validate the author’s research using the analytical tools provided. Readers are also advised to obey all applicable laws, whether or not enforced in their area. Neither the Consumer Awareness Institute nor the author assumes any responsibility for the consequences of anyone acting according to this information. Acknowledgements My thanks go to scores of committed consumer advocates, government officials, attorneys, media representatives, investment advisors, educators, former MLM (multi-level marketing) victims and participants, web designers, and persons who have shared their experiences and feedback from countries all over the world. I want to give special recognition and thanks to the following persons who joined me in a prolonged series of communications with the FTC staff to encourage them to act responsibly in the rulemaking proceedings for the Business Opportunity Rule: Douglas M. Brooks, Martland & Brooks, LLP, attorney, franchise, distribution and consumer protection litigation, including cases involving MLM firms Robert Fitzpatrick, Robert L. Fitzpatrick, President, Pyramid Scheme Alert, author – False Profits and operator of the web site www.pyramidschemealert.org, Bruce Craig, former Assistant Attorney General, State of Wisconsin – litigated landmark cases against Koscot Interplanetary, Amway, and other MLM companies Stephen Barrett, M.D., publisher of Consumer Health Digest, operator of anti- quackery websites and the web site www.mlmwatch.org, Eric Scheibeler, former federal auditor, author – Merchants of Deception 1 DESCRIPTIVE TABLE OF CONTENTS NOTE: Along with other evidence, 21 items are checked (√), which signal (like smoking guns) the FTC staff favoring paid DSA/MLM lobbyists over unpaid consumer advocates. While none of these pieces of evidence are conclusive in and of themselves, the 21 – taken together – demonstrate a clear pattern of “regulatory capture,” in which a seriously flawed industry – which the FTC should be regulating as an unfair and deceptive practice – has manipulated the FTC to protect its interests, rather than the interests of consumers. Page nos Contents 1 Preface, background, and summary 3 Attorney Douglas Brooks accurately predicted DSA/MLM resistance to any law or rule that might harm its members, even if it was important for consumer protection 6 INITIAL PROPOSED BUSINESS OPPORTUNITY RULE (IPBOR) IPBOR notice and applicable excerpts 17 √ The DSA’s 336-page shotgun blast of arguments defending a flawed industry –Summary 20 √ A revolving door has evolved among FTC officials (Timothy Muris, J. Howard Beales, III, and Joan Bernstein) – from consumer protection to fraud protection 24 √ Qualified independent research on MLM as a business model ignored by FTC staff – comments by Dr. Jon M. Taylor of Consumer Awareness Institute 25 √ Robert FitzPatrick, another consumer advocate – whose research corroborates Dr. Taylor’s research, proving the need for disclosure by MLMs – was also rejected by the FTC 29 A better definition of what constitutes an illegal pyramid scheme was suggested by Bruce Craig, former assistant to the Attorney General for Wisconsin 32 Attorney Doug Brooks offers a cogent comment letter based on long experience in this field – and supports the research of Taylor & FitzPatrick (Exhibit A is the Report by Prof. Robert Blakely of Notre Dame Law School showing Amway to be similar to organized crime.) 33 Important testimony and research from consumer health advocate and MLM Watch sponsor Stephen Barrett, M.D. – who also supports the research of Taylor and FitzPatrick 44 √ Massive volley of 17,000 questionable submissions overwhelmed FTC staff 46 Over 5,000 of 17,000 comments were generic form letters, others submitted at the urging of the company, and others submitted by the upline or company in their name 47 √ Results of a survey of IPBOR commenters show the questionable validity of the conclusions drawn from the 17,000 pro-MLM comments 48 √ FTC staff sought comments from former FTC Chairman-turned-lobbyist Timothy Muris – whose arguments were parroted in the Revised Rule 50 √ False and misleading arguments by former FTC official-turned-lobbyist Timothy Muris for Primerica and the MLM industry debunked by Dr. Jon Taylor 52 IPBOR REBUTTALS Dr. Jon Taylor rebutted 17,000 comments (from 28 MLMs) – in effect, challenging one voice 57 √ False & misleading comments by former FTC official-turned lobbyist “Jodie” Bernstein– plus comments by U.S. Chamber of Commerce & DSA rebutted by Jon Taylor 58 Rebuttal of DSA comments by Jon Taylor (includes breakdown of comments & sample form) 60 Rebuttal of DSA and MLM firms by Dr. Stephen Barrett of mlmwatch.com 72 DSA’s attempt to rebut CAI and PSA 73 Rebuttal of CAI & PSA for Quixtar (Amway), aided by former FTC-turned lobbyist Jody Bernstein 77 √ The sheer number of false & misleading statements made by former FTC Chairman-turned-lobbyist Timothy Muris is stunning. 78 √ Using campaign donations from MLMs and an implied huge voting block as an incentive, DSA/MLM lobby influenced Congressmen to weigh in on BOR 91 2 REVISED PROPOSED BUSINESS OPPORTUNITY RULE (RPBOR) RPBOR notice and applicable excerpts (and proposed disclosure form) 93 √ The DSA boasted of influencing BOR with a $4 million lobbying campaign 97 Terse – and highly appropriate – comments about RPBOR by Dr. Stephen Barrett. 102 Comments re RPBOR by Dr. Jon Taylor, who provided extensive research about MLM fraud, which was dismissed by FTC staff. Serious problems with BOR 103 Why the FTC’s Revised Proposed Business Opportunity Rule should be set aside 106 Cogent comments criticizing RBOR by Robert FitzPatrick of Pyramid Scheme Alert (PSA) 110 An open letter from Robert FitzPatrick to members of the U.S. Federal Trade Commission 111 √ Former FTC Chairman-turned lobbyist Muris continued his efforts to influence former employees on behalf of Primerica & the MLM industry – comments by Jon Taylor 116 RBOR REBUTTALS List of RPBOR rebuttals – 17 of 31 from Jon Taylor 119 Rebuttal of DSA comments by Jon Taylor 120 Exhibit 1: Top ten reasons for the FTC to be suspicious of lobbying by the DSA 127 √ Exhibit 2: DSA-MLM member firms qualify as recruitment-driven MLMs 128 PUBLIC WORKSHOP ON PROPOSED BUSINESS OPPORTUNITY RULE CHANGES News release and notice in Federal Register, followed by highly relevant comments by Bruce Craig, Jon Taylor, the DSA, and Tupperware (non-member DSA plant) 129 √ Behavior of FTC staff and DSA attendees at the workshop 131 Doug Brooks weighed in again with highly relevant comments 132 At workshop, Dr. Taylor insisted BOR is invalid & gave strong reasons why it must be vacated 134 Notice of Corruption for ex parte communications between FTC staff and DSA officials and membership 143 √ The only reference book of research on MLM as a business model and as an industry by qualified independent experts who volunteer resources to help consumers was dismissed by FTC staff 146 ISSUED IN DECEMBER OF 2011 – √ 17,000 pro-industry comments were given greater weight than united voice of unpaid consumer advocates objecting to MLM exemption 149 √ Pro-MLM comments by attorney Jeff Babener on DSA influence 156 √ Some communications between DSA and FTC officials not disclosed in response to FOIA request 161 √ FTC Press Conference – “FTC Negligence of Pyramid Scams Moves to Denial Stage?” – by Robert FitzPatrick, followed by FTC Media Advisory 169 Recent articles and media relevant to BOR 171 Unprecedented Wall Street saga of the bet by William Ackman against Herbalife – his $1 billion short sale of Herbalife stock – and those who bet against him 177 “Ackman was too kind in his attack on Herbalife” – Seeking Alpha article by Jon Taylor 177 FTC action leads court to halt alleged pyramid scheme (FHTM) 183 The DSA manipulation of the FTC’s BOR is the very embodiment of “regulatory capture” 185 Letter sent to three top FTC officials and to the director of CFPB, with a copy of report and of the book The Case (for and) against Multi-level Marketing – over 600 pages total 186 Form letter received in response to the above letter & over 600 pages & 18 years of research, including analyses of approx. 500 MLMs) sent to 3 top FTC officials & to the CFPB 189 Open letter to new FTC Chairperson Edith Ramirez: “Please uphold the FTC’s consumer protection role that was severely compromised in the MLM exemption to the Business Opportunity Rule” Followed by identical form letter as that sent in response to three top FTC officials earlier 190 Addendum #1: Update – MLM complaints filed with FTC, and ongoing DSA meetings with FTC staff 193 Addencum #2: The DSA scores again with changes in the FTC’s “Cooling Off Period” rule 195 FINAL CONCLUSIONS 197 APPENDIX: Excerpts from “The Main Street Bubble: A Whistleblower’s Guide to Business Opportunity Fraud.