Sometimes, life is like a box of cacao products

Scotty Reifsnyder
The Washington Post
August 1, 2014

Enrique Martinez didn't like chocolate, but he was eating as many as 10 pieces a day, drinking chocolate protein shakes and rubbing a chocolate-based skin cream on his face. It was expensive chocolate, too. Martinez and his wife, Michelle, were going through $2,000 in chocolate a month.

The debt they accumulated this way — more than $100,000 over five years — is now with a consolidation company. Their credit is ruined. There is a crack in the driveway at their home in Albuquerque from a 14-wheeler that once delivered 12,000 cans of chocolate energy drinks to their garage.

The chocolate came from MXI Corp., which uses a controversial business model called multilevel marketing. MXI has more in common with Avon Products, Herbalife and Amway than with a conventional candymaker such as Hershey. These are companies without a sales force that recruit their customers to sell products, often in bulk to other customers, who might in turn sell to other customers, and so on.

Critics accuse multilevel marketers of using slick pitches to persuade the unwary to buy goods in bulk, promising them that they'll make money by selling those products to others. In this way, the companies are paid upfront, and the rank and file bear a good deal of the financial risk.

Defenders of multilevel marketing say the business model makes sense. They say the customers are largely enthusiasts who initially join to buy their favorite products at wholesale prices, not to make money. They add that, in any industry, satisfied customers often make the best salespeople.

What's more, companies such as MXI offer these customers, who are effectively their salespeople, refunds on unsold inventory and other protections so that they are never forced to remain part of the organization. That many do so anyway demonstrates that the products are genuinely popular both in themselves and as a source of income, according to the Direct Selling Association, multilevel marketing's trade group.

"These people are making a life for themselves, or helping themselves, however modestly, by virtue of this activity," said Joe Mariano, the association's president. (MXI is not one of its 171 members.)

Yet industry analysts and investors say that in some companies, nearly all recruits will lose money. Former multilevel marketing distributors compare the groups to cults. For decades, the model also has drawn scrutiny from regulators. Late last month, a grand jury returned a fraud indictment against the owners of a multilevel marketer called TelexFree that sold telephone services.

Bill Ackman, the wealthy hedge-fund manager who reportedly bet $1 billion that Herbalife's stock price would fall, has accused the company of fraud, most recently in a presentation to investors last month. The company sells powdered protein shakes and supplements in what Ackman calls a pyramid scheme. Wall Street has heatedly debated his claims.

Herbalife revealed in March that it is under investigation by the Federal Trade Commission. The company has stated that it complies with the law and that it will cooperate fully with the investigation.