Life Without Debt Leaves Jimmy Phipps Owing Society

Phipps was a frail, skinny kid who suffered from asthma and a hearing defect. He was a slow learner with an "underachiever complex." Yet Phipps seems to have inherited his father's knack. As a teenager he built racing cars out of junkyard scrap, one of which he throttled to numerous victories at the Amarillo Dragway.

He eventually parlayed this fix-it know-how into an elaborate computer system that governed his vast multilevel marketing networks. He fed his computers names, contribution amounts and membership numbers. His computer regurgitated vouchers with the exact cash amounts to be disbursed to members along with the necessary mailing labels. He even developed an "automatic talking money machine," a gizmo members could call, key in their membership number, and receive voice confirmation of the members currently in the matrix below them, how much money they had received and how much more they had coming to them.

"Jimmy is a kind of mathematical genius," Austin says. Yet his education was limited. Barely graduating from high school in 1966, Phipps attended a semester of junior college in Levelland, Texas, and to that added a semester at West Texas State at Canyon (now West Texas A&M University), which was enough to convince him he was not college material.

Multilevel marketing has a soiled reputation. A blurred line separating the legitimate from the unsavory seems to reflexively trigger skepticism. In its illicit guises, MLM is a pyramid scheme or Ponzi scheme, the latter named for the postal reply coupon investment scam pioneered in 1920 by Charles Ponzi.

In legitimate forms, MLM is a system of word-of-mouth direct selling that companies deploy in lieu of costly advertising. MLM companies operate by recruiting multiple layers of non-salaried distributors who earn commissions by selling products or services. Commissions are often supplemented with bonuses based on the sales of those in a distributor's "downline," which includes direct recruits, recruits' recruits and so on down the network. Different distributors scattered over several different levels often receive royalties generated from one distributor's sales.

Generally, a fraudulent pyramid emphasizes recruitment of salespeople or members over product sales, requiring substantial investments from each recruit either in fees or to purchase materials for sale. Perpetrators of these schemes generate revenue almost exclusively from up-front cash investments, often from unsuspecting recruits. Life Without Debt members didn't accumulate inventories of Phipps' books and tapes to retail to other customers. Instead each member was required to sell memberships that included single copies of his books and tapes for each member's own use.

Yet even legitimate MLM programs have checkered reputations, sometimes butting heads with federal regulators. Typical MLM programs pressure distributors to leverage relationships with family and friends, or "warm leads," while the vast majority of distributors fail to earn even marginal incomes. MLM companies have sold everything from newsletters instructing people on how to sell newsletters, to gold medallions, to milk cultures that allow distributors to grow and sell other milk cultures, to gasoline additives. The names of the successful are familiar: Herbalife (weight-loss, nutrition, skin-care products), Nu Skin Enterprises (cosmetics, nutritional supplements), Mary Kay and Excel Communications—now Irving-based Excel Telecommunications—a Dallas-based long-distance telephone service reseller founded by entrepreneur Kenny Troutt.

But the granddaddy of all MLM firms is Amway, shorthand for American Way Association. Founded in 1959, Amway markets personal care products, Nutrilite dietary supplements, water purifiers, cosmetics, household soaps and cookware. Amway parent Alticor posted 2006 revenues of $6.3 billion, with more than 70 percent of Amway sales generated in Asia.

Phipps cut his MLM teeth on Amway soaps and pills as a teenager in Muleshoe after an uncle introduced him to the system. It was a flop. Phipps found it all but impossible to generate leads and recruit distributors among Muleshoe's population of 5,000.

So Phipps went to work. After his family moved to Arlington in the early '70s, he worked the parts counter at a Ford dealership. He worked as a construction laborer and trim carpenter. Yet MLM's lure never receded. To Phipps, the system represented salvation from the working grind. He purchased and sold Dare to Be Great, a motivational program published by Glenn W. Turner Enterprises. In the early '70s Turner was known as the "King of Network Marketing" and at his zenith was worth some $300 million. But by 1975 he had run afoul of regulators, and the Federal Trade Commission shut him down, charging Dare to Be Great was an illegal pyramid scheme that bilked $44 million from its distributors. Turner was later convicted of conspiracy and fraud in another pyramid scheme in 1987 and served five years in prison.

"I fell in love with the concept of network marketing," Phipps says. He was hooked on the idea of compounding one's income, a dynamic not afforded by a conventional job. But his MLM efforts continued to flop. After marrying in 1976, Phipps barely eked out a living. He was forced to supplement his meager earnings with debt.