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Is the Tea Party Movement Like a Pyramid Scheme?

One of the movement’s leaders, Mark Meckler, was once a top operator in a company accused of conning consumers. Is he applying the same tactics to the tea party?

| Tue Oct. 19, 2010 6:00 AM EDT

While the Mecklers might have found great health benefits in the Herbalife products they were selling, dozens of people sued Herbalife alleging that its supplements had caused deaths, strokes, and heart attacks. That's because Herbalife was one of the biggest sellers of "natural" products made with ephedra. The herb is similar to the chemical ephedrine, an appetite suppressant and drug often used as an asthma treatment. It’s not too different from amphetamines. The dangers associated with ephedra, and the ensuing lawsuits, prompted many insurance companies to jack up the rates or drop companies like Herbalife that sold it.

The Mecklers claimed to be averaging more than $20,000 a month from their Herbalife business, which they said was giving them "newfound freedom" to be better parents and to spend more time with friends.

In mid-2002, the company reported that because of the wrongful death suits pending against it and the problems with ephedra, the company’s liability insurance premiums had jumped from $400,000 a year to $2.5 million a year, a move that ultimately prompted Herbalife to quit selling ephedra products soon after. In 2004, the FDA banned ephedra's use in supplements because of the reports of adverse affects.

Still, Meckler's business didn't seem to suffer from the bad publicity. In the 2002 magazine profile, the Mecklers claimed to be averaging more than $20,000 a month from their Herbalife business, which they said was giving them "newfound freedom" to be better parents and to spend more time with friends. "In this business, if you focus on taking care of people and helping them, the check will come and so will everything else you are trying to accomplish," Mark said.

Not everyone drawn in by the Herbalife pitch was quite as successful. In 2004, the company paid $6 million to settle a class action suit filed by 8,700 Herbalife distributors who alleged the company was a pyramid scheme. (Meckler was not named in the suit.) According to the lawsuit, many of the people induced to join up lost between $10,000 and $50,000; some were even forced into bankruptcy.

"Herbalife has virtually no customers and is not really in the direct selling business," explains Robert FitzPatrick, an expert in pyramid schemes who was a witness in the case. "It gets the great majority of its revenue directly from its salespeople who pay fees and buy marketing materials and products from Herbalife as part of the income scheme. Herbalife's real product is the income scheme, and its real customers are its salespeople."

He says the company annually churns through as many as 90 percent of the lowest level distributors, a figure Herbalife has disclosed in its SEC filings. The people who end up making money at Herbalife, says FitzPatrick, do it by "unscrupulously and aggressively telling people: 'You can make money.' If you're willing to say all that, do the script, you can build a network."

Meckler hasn't been an Herbalife distributor since 2004, according to the company, but he didn't stray far. Since at least 2007, he has worked as the general counsel and chief operating officer of UniqueLeads, a Florida-based company owned by Shai Pritz, another member of Herbalife's president's team. The company provides marketing and "lead generation" services to companies like Herbalife. Through a network of "affiliates"—usually web publishers, bloggers, or anyone who can put up a website—the company helps place ads across the Internet as a way of generating contact information lists for sales and other pitches. The firm has offered its affiliates the chance to place ads for organic hair growth products, colon cleansers, acai berry weight loss products, various "credit repair" sites, a teeth whitener, work-from-home offers, and even one for a dietary supplement that promises "slow down the aging process" and help you lose weight, too. Pritz also owns UniqueLists, a data management company that sells the contact information harvested through the online ads.

The companies are part of the Internet advertising industry known as affiliate marketing, which, like MLM, has a reputation for relying on unscrupulous practices. In 2009, the Federal Trade Commission sued several entities that recruited affiliate marketers to market “government grants” on websites that displayed the President’s photo and purported to offer consumers a way to obtain money from the economic stimulus package. Visitors who signed up to receive grant information for a few dollars allege that they later found their credit cards charged monthly for memberships and services they didn't ask for. (A federal judge shut down several of the sites, and more charges were added in April. The case is ongoing.) The industry is plagued with allegations that affiliate marketers are infecting consumers' computers with spyware and adware to surreptitiously boost click revenues. In June, a federal grand jury indicted two of eBay's highest-producing affiliates, two men who raked in about $20 million from the company between 2006 and 2007 allegedly through an illicit scheme that generated thousands of ad clicks in the computers of unknowing users. (The case is still pending.)

Meckler's job, apparently, has been to keep UniqueLeads out of trouble with regulators through an in-house "compliance" program. Before he made his first public speech at a tea party event in 2009, Meckler was speaking at affiliate marketing conferences and writing advice columns on how to avoid run-ins with the law. In one column Meckler wrote in a trade publication, he warned affiliate marketers that the FTC was poised to crack down on companies that tricked people into giving up contact information and credit card numbers online with offers of "free" stuff that wasn't free at all. "After the FTC contacts you, it's too late, and the FTC is going to extract their pint of blood, in addition to forcing you to comply," he wrote. 

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