Letter from the publisher.
In December 2008, one of Wall Street's most trusted names in managing money, Bernard L. Madoff, was arrested by FBI agents for defrauding his clients. (1) Taking a client's money for one's own aggrandizement has been a "time-honored" way for scoundrels to make themselves richer. Madoff helped himself to a little bit more money than the usual chiseler; by his reckoning, more than $50 billion of clients' funds were gone. Fortunately, the clients were not the middle-class families in Sheboygan and Wichita (although those may be indirectly hit by this swindle). In this case, the losers were the rich and famous--millionaires and billionaires like New York Mets owner Fred Wilpon and GMAC chairman J. Ezra Merkin. Also screwed were a bevy of hedge funds like Tremont Management and giant banks like French BNP Paribas. It sounds like nothing more than getting suckered into the subprime mortgage leveraging with those unwieldy financial instruments known as collateralized debt obligations (CDO) and the nefarious credit swaps. But it wasn't. Madoff ran a stock brokerage house for years and created a name for himself respected for probity and legitimacy. He was formerly a chairman of the board of NASDAQ. More importantly, he was renowned for making lots of money for the big boys, bringing in one-percent returns on their investments monthly! Some competitors and regulators knew that this was an impossibility--there could be no way one could consistently bring in a one- to two-percent return on stocks and similar instruments in good and bad times. Despite the warnings, Madoff managed to play his game without oversight, managing the funds in a tucked-away office far from auditors' eyes, until last month when investors demanded $7 billion to be liquidated--and, of course, there was no such reserve available. The coup de grace was Mr. Madoff's sons' disclosing his wrongdoing to the authorities. How Shakespearean is that!
Madoff's strategy probably would have worked indefinitely or at least into the near future if a host of panicky investors had not wanted to cash out their positions. In Madoff's own words, he was running a Ponzi scheme. Investors would give Madoff money to manage with the promise of a good monthly return, which Madoff delivered unfailingly for years. However, the return did not come from an investment making good. Instead, Madoff took the "new" money coming in and used a percentage of it to pay the returns on the "older" money. Investors came flocking in from all the well-moneyed communities--Palm Beach, Boca Raton, Lake Success, the Hamptons, and Hollywood. The buzz on the golf course, in the tennis club, and at the charity dinners was that Madoff made money. Invitation-only sessions organized by the well-to-do in East Coast country clubs brought in family accounts frenetically.
The outraged reaction by the families and banks and hedge funds to Madoff's scam makes one think of the German term schadenfreude: the pleasure taken from observing misery in others. After all the golden parachutes and bonuses paid to the Wall Street bankers, there is a definite sense of glee that many of the big boys have lost and lost big. Of course, Madoff deserves to be tarred and feathered for his iniquity. It seems that entitlement is the order of the day--Madoff undoubtedly felt entitled to endless riches for ripping off the rich and famous. He'll probably be heading to jail. But where does that leave the "lofty" profession of money management? Can we ever again trust our money to anyone?
(1.) Frank R, Lattman P, Searcey D, Lucchetti A. Giant fraud hits big names. Wall Street Journal. December 13, 2008:1.
Food Supplement Pyramid Schemes
Manufacturers sell vitamins to the public through supplement chain stores and grocers. Supplements manufactured for distribution through health professionals are generally sold by companies directly to doctors. In the mid-1900s, some savvy entrepreneurs decided that a new economic model might be a more profitable means to distribute food supplements. Amway Corporation designed a distribution model in which the manufacturer would sell food supplements and other items such as laundry soap to member-distributors only. This meant that a consumer would only be able to buy the food supplement by becoming a member-distributor of Amway or by seeking out a member-distributor to purchase the product. If memberdistributors were each individually registered by management, this model would provide a direct purchase agreement between the consumer and the company. However, the Amway model provided that memberdistributors could and should signup member-distributors who would purchase products through the first member-distributor. Further, the second line of member-distributors were encouraged to sign up additional ones, who would then do their purchasing through the second member-distributors.
Of course, since the second distributor-member needed to purchase his products through the first distributor-member, there would be a pyramid relationship of purchasing. Amway has been challenged legally in the past to defend its business model. It has won numerous court decisions defending its means of doing business and has argued successfully that it is not a pyramid scheme, nor a Ponzi scheme, nor does it condone such activities.
Nevertheless, individual member-distributors collect monthly revenue based not only on purchases of member-distributors immediately below them but also in all the chains of members below them. This distribution method has led to the term "multilevel supplement sales"--a relatively small number of top line distributors in Amway designate themselves as "diamonds" for forming massive business organizations based on the pyramid-level member-distribution sales. Needless to say, there is a strong profit incentive to sign up as many member-distributors as possible, as well as to enable them to sign up their own "downlines."
Furthermore, such a model for selling and distributing food supplements has become more popular in the US and internationally. Multilevel food supplement companies sign up member-distributors to sell and distribute their vitamin products. Member-distributors are encouraged to sign up member-distributors below them. The mechanics of a pyramid distribution system usually follow the Amway model in a general sense. Differences occur due to varying percentages of commissions, depending on the volume of sales and placement in the chain of member-distributorship. The higher the volume of sales and the higher up the member-distributorship chain, the higher the commission. Additionally, there are rewards for unusually high volumes, sign-ups of member-distributorships, and winning varying contests. The model provides very high incentive for member-distributors to purchase and sell products as well as to persuade consumers and health professionals to do the same. The pressure to succeed financially in such organizations is so high that member-distributors frequently resort to pressure tactics to sell products and memberships.
Food supplements marketed in multilevel management systems also tend to be proprietary products deemed to have unusually high-quality, unique features unavailable elsewhere in the marketplace. Producers of these products also often claim that they have health qualities that not only are superior but curative. Indeed, multilevel distribution groups frequently hold meetings to extol the benefits of the proprietary formula, and not infrequently, such rah-rah sessions lead to public announcements of extraordinary claims for proprietary herbal formulas. Each year, new companies form, each with a similar model and each championing a special supplement. While many companies fail, a growing number of multilevel manufacturing companies continue to prosper using this model, including Sunrider and BodyWise.
The one sad aspect of multilevel marketing of supplements is that such pyramid marketing systems create a false promise of financial success for many member-distributors. Pyramid schemes always benefit those higher up on the food chain--the commissions paid to member-distributors at the bottom are minimal. Additionally, food supplement products sold by multilevel companies are expensive, generally 200% to 300% more expensive than a comparable product sold in the marketplace. The sales strategy in multilevel marketing of supplements is to justify the high costs by claiming extraordinary benefits from using the herbal and vitamin formulas and to lure individuals into thinking that riches will be made by joining the organization and working from home. While the few strike it rich, the vast majority fail and usually leave the organization after one or more years of poorly compensated work. Multilevel companies lean on the legality of Amway to justify their model. But a pyramid scheme is just that--a pyramid scheme, and one may even argue that there are elements of a Ponzi scheme. Doctors, patients, and consumers should be justifiably distrustful of multilevel marketing of supplements. A good vitamin or herbal supplement should be manufactured by good manufacturing practices, offer excellent quality control, have scientific studies to base its claims, and offer reasonable pricing for its sales. Food supplement use should not be a matter of cheerleading and arm-twisting, nor should it hoodwink the unsuspecting into a fruitless effort to earn an income.
Best of Naturopathic Medicine
Every two years, we invite naturopathic students and faculty, clinicians, and practitioners to enter our "Best of Naturopathic Medicine" competition. Entries accepted include review articles, original research, and essays. This year, articles came from naturopathic colleges in the US and Canada including Bastyr University, National College of Naturopathic Medicine, Canadian College of Naturopathic Medicine, Southwestern College of Naturopathic Medicine, and University of Bridgeport College of Naturopathic Medicine. We would like to acknowledge the efforts of Rita Bettenburg, dean of National College of Naturopathic Medicine, and Jennifer Neufeld of the Canadian College of Naturopathic Medicine for their extra effort in facilitating entries from students and faculty. We would also like to invite the naturopathic community and Townsend Letter readership to plan on entering our next competition for 2011 with entries due by Oct. 1, 2010. (Papers completed in the near future are welcome and may be submitted early!)
The etiologic relationship of environment pollutants and attention deficit hyperactivity disorder is controversial--for the most part medicine does not accept that pollution can play an important role in ADHD. More controversial yet is the treatment of children with detoxification techniques to remove toxic elements, chemicals, and other sources of pollution. The use of chelation by chemical agents such as EDTA and DMPS in this age group has come under particular criticism. Dugald Seely, ND, director of research at the Canadian College of Naturopathic Medicine (CCNM) together with assistant professor Kieran Cooley, ND, and research associate Heidi Fritz, ND, authored a review of the links between ADHD and environmental pollution. Their look at the evidence in support of this relationship is sobering--lead appears to be the toxic element most implicated in eliciting ADHD with lead accumulation developing in infancy, not prenatally. The evidence suggests that relative iron deficiency aggravates the adverse effects of lead. Some larger studies on naturopathic interventions as well as chelation do not show uniform longterm improvement for this disorder, although small studies suggest such treatments do offer improvement. Seely, Cooley, and Fritz's paper won our "Best of Naturopathic Medicine" prize.
In medicine hiatal hernia has been recognized as a cause of long-standing heartburn, especially prevalent in the older population. Conventional treatment options have included recommendations to changing diets to those that are less spicy, rich, or fatty, and to avoid lying down shortly after eating. Additionally, patients have been advised to use antacids. However, in the past two decades, pharmacologic interventions have been introduced that have tended to ignore hiatal hernia syndrome and instead focused on esophageal inflammation. The syndrome gastroesophageal reflux disease (GERD) has largely co-opted the diagnosis of hiatal hernia--doctors and patients alike attribute symptoms to GERD and rarely speak about hiatal hernia anymore. Steven Sandberg-Lewis, ND, professor at National College of Naturopathic Medicine, has studied hiatal hernia syndrome and attributes heartburn to hiatal hernia rather than GERD. Untreated hiatal hernia may be a causative factor in developing chest pain, cough, shallow breathing, and even mental dullness. Sandberg-Lewis offers a manipulative technique originally developed by a chiropractor to treat hiatal hernia. Sandberg-Lewis's report won our "Best of Naturopathic Medicine" prize.
Traditional Chinese Medicine (TCM) has occupied a central role in health care in China for centuries and has slowly developed a following in the West. The emergence of scientifically oriented pharmaceutical medicine in China has created a dual system, with surgical/drug approaches administered on one side of the hospital and herbal decoctions dispensed on the other. For the Chinese this duality works: patients recognize the need to treat emergencies critically with drugs but still seek herbals to treat chronic conditions. TCM considers the patient's constitution and life force or "qi," in making any diagnosis. In the West, over the past three centuries, homeopathy developed as a treatment system separate from allopathic medicine. The homeopaths considered energetics to be key to the healing process. Unfortunately, twentieth century medicine in the West disputed homeopathy, and its practitioners and devotees largely needed to practice underground. The recent growing interest in alternative medicine has brought homeopathy back to Main Street, but mainstream medicine remains leery of its premises. TCM practitioners Mario Fontes, MSOM, and Stephanie Pina, ND, also practice homeopathy. Their experience with both systems led them to question whether herbal medicine and homeopathy can be integrated as a healing technique. Fontes and Pina explore the connection between homeopathy and Chinese medicine in their article, which won our "Best of Naturopathic Medicine" prize.
In the mid-1970s, the American and Canadian Psychiatric Associations decided to investigate a new treatment for schizophrenia and mental disorders. Treatment protocols predicated on the use of very high-dose vitamin mineral supplements were touted as benefiting schizophrenia, depression, and anxiety disorders. The associations' verdict was unsurprising--they found that megavitamin therapy was not useful for treating psychiatric disorders. The reports were harsh in condemning medical practitioners for considering such unproven therapies. The viewpoint in academia and at psychiatric institutions was a uniform disdain for such approaches. The few physicians who were steadfast in studying and researching such therapies formed their own societies using the label "orthomolecular therapy" to describe such treatments. Baljit Grewal, BSc, MPH, naturopathic student at Canadian College of Naturopathic Medicine, decided that such treatments deserved a second look. She examined the rationale and clinical outcomes in treating mental disorders with differing nutritional therapies and orthomolecular treatment. Over the last three decades, there has been increasing evidence that such therapies are helpful, especially with depression. Grewal's article won a "Best of Naturopathic Medicine" prize.
We invite you to submit a paper for our next competition!
Jonathan Collin, MD
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|Title Annotation:||Bernard L. Madoff, food supplement pyramid schemes and the 'Best of Naturopathic Medicine' competition|
|Date:||Feb 1, 2009|
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