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Quite apart from being the sure road to losing money quickly, MLMs are also dangerous for philosophical and moral reasons. They encourage magical thinking: the belief that the all-important thing for success is optimism, drive, and "being a go-getter", and that this is more important and will overcome all stubborn facts.

What's more, contrary to their claims that they are "independent" and "businessmen" unlike those nasty ol' Just-Over-Broke losers, in reality MLMers are parasites: they exploit natural feelings of friendship, kinship and trust for monetary gain (which is usually nonexistent in any case). They use their family's and friends' trust in them to sell them worthless stuff at high prices and get them into their "downline", and if any when they ever make it into the top, they make money mostly from the abuse of the trust of the people in their "downline": promising them that if only they keep giving them money, they will eventually "make it".

The magical thinking aspect of the MLM cults, their worship of 'success', has never been better exposed than in G. K. Chesterton's 'The Fallacy of Success' (in All Things Considered). The fallacy is that there is no such thing as 'success' in general: there is only success in some particular thing, from chess to carpentry. Those -- MLMers in particular -- who worship 'success' and go to workshops about how to be 'successful' always fail, since they never learn how to be successful in anything in particular, and are only there to learn how to act like people who are successful in something act. As Chesterton says (he was a very entertaining writer, so worth quoting in length):

These writers profess to tell the ordinary man how he may succeed in his trade or speculation—how, if he is a builder, he may succeed as a builder; how, if he is a stockbroker, he may succeed as a stockbroker. They profess to show him how, if he is a grocer, he may become a sporting yachtsman; how, if he is a tenth-rate journalist, he may become a peer; and how, if he is a German Jew, he may become an Anglo-Saxon. This is a definite and business-like proposal, and I really think that the people who buy these books (if any people do buy them) have a moral, if not a legal, right to ask for their money back.

If you are in for the high jump, either jump higher than any one else, or manage somehow to pretend that you have done so. If you want to succeed at whist, either be a good whist-player, or play with marked cards. You may want a book about jumping; you may want a book about whist; you may want a book about cheating at whist. But you cannot want a book about Success. Especially you cannot want a book about Success such as those which you can now find scattered by the hundred about the book-market.

You may want to jump or to play cards; but you do not want to read wandering statements to the effect that jumping is jumping, or that games are won by winners. If these writers, for instance, said anything about success in jumping it would be something like this: "The jumper must have a clear aim before him. He must desire definitely to jump higher than the other men who are in for the same competition. He must let no feeble feelings of mercy (sneaked from the sickening Little Englanders and Pro-Boers) prevent him from trying to do his best. He must remember that a competition in jumping is distinctly competitive, and that, as Darwin has gloriously demonstrated, THE WEAKEST GO TO THE WALL."

Quite true. What these books do -- and what MLM or other 'success seminars' do -- is, as Chesterton says:

In such strange utterances we see quite clearly what is really at the bottom of all these articles and books. It is not mere business; it is not even mere cynicism. It is mysticism; the horrible mysticism of money. The writer of that passage did not really have the remotest notion of how Vanderbilt made his money, or of how anybody else is to make his. He does, indeed, conclude his remarks by advocating some scheme; but it has nothing in the world to do with Vanderbilt. He merely wished to prostrate himself before the mystery of a millionaire.

Indeed so. Anybody who had ever been to one of those seminars can tells us how they are all about worshiping success -- either of the "big pin" in Amway or of a similar person -- not because those people tell them anything worthwhile about how to make money, but merely because those people made money.

Never mind that, as in the case of most such authors, the author himself made the money not in business, but in selling books and ridiculously overpriced "training programs" about success; never mind that the books and seminars are worthless, giving nothing more than rah-rah positive thinking and trite advice (like in the book above); all that matters is to attach oneself in some way to the millionaire, the "big pin", the "top upline", etc., out of the belief that if you try to act like them, you'll be like them -- a belief on par with the primitive tribesman's belief that if they eat lion's meat, they will be as strong as a lion.

As for the parasitic, trust-destroying nature of MLMs, their raising of selfishness to a positive good, their looking-out-for-number-one attitude, Andrew Oldenquist noted, in his book The non-Suicidal Society:

Running through most of these books is the idea that there is a quick and simple secret to success, a psychological gimmick that will bring you affection, sex, the esteem of others, and power over them. They are books for failures, for mice who would be supermen, and who want to be respected, obeted, and caressed without having to posses the character that makes one worthy of respect, obedience, or caresses. They parallel, in the realm of psychology and the spirit, the books whose gimmick for financial success is optimism, selling from your home, or buying a Cadillac for image before making your first detergent sale.

If everyone were to try to follow the advice in these books our society could not existed. A life wholly dedicated to dissimulation or manipulation can only exist within an environment in which the rest of us most of the time believe what we are earnestly told, act on principle and from group loyalties, and try to do our fair share... The manipulator must be carried on a sea of people who themselves to not lead that kind of life. The advice of the selfishness manuals is like a pyramid club or chain letter scheme in which only those who get in early are able to profit.

For MLMers, like for used-car salesmen, honesty, caring, and trust are merely instrumental, all sacrificed to the moloch of non-existent 'success'. It is better, if one is an MLMer, to appear honest, fair and non-exploitive than to actually be honest, fair, and non-exploitive. Hence, notes Oldenquist, the frenzied attempt in 'success' seminars and MLMs about marketing yourself, public relations, 'dressing for success', appearing to be making money as one loses one's shirt (so that it is easier to "sponsor" potential victims), and so on.

There is nothing new here, of course. 2500 years ago, there were already men who thought this way:

For what men say is that, if I am really just and am not also thought just, profit there is none, but the pain and loss on the other hand are umistakakable. But if, though unjust, I acquire the rputation of justice, a heavenly life is promised to me. Since then, as philosophers prove, appearance tyrannizes over truth and is lord of happiness, to appearances I must devote myself. I will describe around me a picture and shadow of virtue to be the vestibule and exterior of my house; bnehind I will trail [like] the subtle and crafty fox...

This is Adeimantus, in his challenge to Socrates in Plato's Republic.

Does this not describe perfectly the average MLM "big pin" and "go-getter" -- speaking of virtue, success, "family", etc., while demanding the downline miss another car payment as they go broke fast to enrich him?

Labels: MLM, pyramid scheme

How many hedge funds are actually just pyramid schemes? How many hedge funds that aren't hedge funds are seriously cooking their books?

Nobody knows, but as the financial bust continues the shakeout among hedge funds continues. The investors in Valhalla Investment Partners woke up this weekend to discover that their high-return hedge fund was just another pyramid scheme. Arthur Nadel, the owner of Scoop Management has disappeared and apparently taken investors' remaining moneys with him according to various news reports. The FBI is investigating.

The Valhalla fund reported annual returns of 32 percent from 2000 through 2006 -- yeah, right. But as Warren Buffet says, when the tide goes out you can see who is swimming naked, and it is pretty clear that Valhalla's returns were bogus all along.

Another philanthropist (it's easy to be a philanthropist when you are giving away somebody else's money), Arthur G. Nadel did not let being disbarred for fraud, dishonesty, and misrepresentation keep him from becoming a high-flying hedge fund manager. Even minimal due diligence by investors would have picked up this enormous red flag, but apparently no investors took the time to do so and now they've lost their money.

The problem with hedge funds is that they are opaque, nobody knows what is going on with them in any given moment, and probably many of them are just pyramid schemes. If you have money in a hedge fund, now is a good time to think about taking it out, as the hedge fund shakeout may last some years.

Source: Bloomberg click here

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Labels: arthur nadal, hedge fund, nadal, pyramid scheme, valhalla

So you were lucky enough to receive money back from Bernie Madoff before his pyramid scheme collapsed? Think again.

The usual process in pyramid scheme recoveries is for the court-appointed Receiver to obtain all the financial records of the scamster, including bank accounts. Then, disbursements are traced to each recipient, who receive a friendly letter telling that they must send all the money they received back to the Receiver, so that the Receiver can pool the moneys together for distribution to all victims. Oh, and by the way, if the moneys are not returned then the Receiver will either sue the victim or obtain an order to hold the victim in contempt of court.

Upon receiving such a letter, the scam victim yells "Bloody Murder!" and immediately complains that they put more money into the scheme than they ever got back, and are still in the hole.

The Receiver just doesn't care. The money is not that of the victim, the money is that of ALL victims. The Receiver's job is to husband all the remaining assets of the scheme into the pool, and the assets include those that were paid out of the "lucky" victims before the scheme collapsed.

But what if the victim who received money doesn't have any ready cash on hand? Tough. The receiver can bring a lawsuit against the victim, obtain a judgment, and then liquidate the victim's other assets, such as houses, IRAs, etc., until the Receiver gets back all the money received from Madoff.

Brutal? Yes, but necessary to protect all victims. It doesn't make any sense than an investor who received money from Madoff a month ago should be in a better position than one who didn't. The strong powers of the Receiver to claw money out of "lucky" investors is also why there is actually the possibility of some recovery by all victims. In the Reed Slatkin scam, for instance, victims received upwards of 40% of their original investments back. In the Cash-For-Titles scam of the late 1990s, victims received over 70% of their money back.

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Labels: bernie madoff, dating scam, financial scam, pyramid scheme, quatloos, receiver, reed slatkin, slatkin, victims fund, victims pool

Some of the victims of the Madoff pyramid scheme are about to receive more bad news -- If they received any money back from Madoff, the Receiver will want it back.

When a pyramid scheme collapses, the Court appoints a Receiver to husband and sequester all the assets of the scheme for the benefit of all investors. The Receiver will create a Victim's Fund, and all victims will receive a percentage of the Victim's Fund based on the size of their original investment.

The assets of the scheme include payments that the scheme made to others, including payments back to investors. If a Madoff investor received anything back from Madoff -- even if it was less than their original investment -- they will have to give that amount of money back to the Receiver, to be pooled with any other money and assets that the Receiver can find, and then these investors will get their percentage of the Victim's Fund.

If a Madoff investor refuses to pay the Receiver back, the Receiver can sue the investor and make the investor pay the costs and attorney fees of recovery, in addition to getting the money back. In some situations, the Court may also issue order to hold a recalcitrant investor in jail for contempt. "Resistance," as one might hear in a sci-fi B-movie, "is futile." It can also be very costly.

Charities are not exempt from disgorgement. If a charity received money from Madoff, it had better be prepared to give the money back. Charities may have exemption from income taxes from the IRS, but charities have no special exemption at all from Receiver-ordered disgorgement of what amounts to criminal proceeds. This will hit a lot of charities hard at this time when the economy is sharply down and charitable inflows have slowed from a mighty river to a miserly trickle.

Receivers and disgorgement are one of the more unpleasant things about pyramid schemes, and have the effect of re-victimizing the victims, sort of like having a rape victim testify at trial. But it is necessary to protect the rights of all investors, and not just those who received redemptions from Madoff.

Labels: disgorgement, madoff, pyramid scheme, receiver, recovery, redemption, victim's fund

So people lost $50-plus billion to Bernie Madoff, so what? The only difference this time is that a few institutional investors, charities, and celebrities were caught up in this particular pyramid scheme.

Every year, pyramid schemes divest literally thousands of people of their life savings and put seniors on the street. Whether the victims are attracted through internet chat rooms or because the scam artist hoodwinked the local pastor into arranging investments for the benefit of the church, at any given time there are probably hundreds of pyramid schemes running somewhere in the U.S., and thousands more throughout the world.

Here at Quatloos! we have see and tracked many of these scams. For years, we tracked the Omega Trust & Trading scam, where people sent in $100 to buy "units" that were initially promised to give a $2,500 return, which eventually grew to where each unit was alleged to be worth $100,000. Indeed, even when the Omega scammers weren't paying off on the original scam, they ran a subsequent scam to sell "refund units", i.e., the units from other investors who had obtained refunds (although there were not any of these in actuality), and fleeced even more money out of their already-jilted investors.

Perhaps what makes the Madoff scam is the reputation of the main crook. Most pyramid schemes are run by those with no real financial education, background, or experience. Clyde Hood, who ran the Omega scam by contrast, was simply a retired electrician in Mattoon, Illinois. Madoff was the chairman of the NASDAQ from 1990 to 1993 -- no pyramid schemer has ever had such stellar credentials.

All the signs of a scam were there. The high but steady returns, the lack of transparency in how money was being made, and obscure auditors all raised red flags to those interested in knowing. And, indeed, it has since come out that there were at least one significant whistleblower, and maybe several.

But at the end of the day, the investors who lost everything have their own stupidity to blame. Sure, it is always easy to "blame the victim" for not discovering a scam, but this isn't why these investors were stupid. The reason the Madoff investors who lost everything were stupid is that they did not diversify their investments. There is simply no reason why any sane person -- or charity -- would have more than a small part of their investment with an obscure hedge fund like Madoff's. By following even minimal diversification rules, there is absolutely no reason why any Madoff investor should have lost more than 10% of their portfolio.

So why did investors throw caution to the wind and put everything with Madoff: Some combination of laziness and greed. These investors were getting a higher (albeit, paper) return with Madoff than on anything else they were investing in. So, instead of putting in the hard work to find other good investments, or accepting a lower return on their other investments for the sake of diversity, they instead put all their money with Madoff.

Mark Twain once wrote, "put all your eggs into one basket, and then watch it mightily." It's that second part that the Madoff investors missed, and if they weren't going to watch their investments like a hawk, they should have put them into one basket.

The way to avoid being scammed out of your portfolio is the same that it has always been: Diversify, diversify, and diversify. Decide how much is the most that you can lose on any particular investment, and then limit the investment to that percentage. It should be very rare that any particular investment, other than cash or government-backed bonds, should be more than 10% of a portfolio.

And that's not any sophisticated financial strategy; that's just common sense.

Talk about the Madoff scam on our new Madoff Scam discussion forum at http://quatloos.com/Q-Forum/viewforum.php?f=36

Labels: diversified portfolio, fraud, madoff, pyramid scheme, quatloos, scam