Late last week, analyst Douglas Lane at Jeffries & Co. told investors that "direct selling companies" were going to be a good investment in the coming year. His rationale? The industry's ability to penetrate new consumer markets with disposable income, particularly in countries like China, Russia and India.

The news report explained that the "direct selling" industry distributes products by demonstrating them in homes and with product parties.

What the news story left out is the fact that "direct selling" is really a misleading term for what is now more commonly known as multi-level marketing (MLM), or network marketing.

Here's the problem with MLM from a consumer standpoint: The MLM industry has been around for decades, and still fails to be a real player in the retail marketplace. The economy functions by real retail sales from real retailers online and in brick-and-mortar stores. MLM could completely go away and almost no retail consumers would even notice.

In 1979, the FTC ruled that multi-level marketing giant Amway is not a pyramid scheme, after years of controversy surrounding the company. While Amway still has a shady reputation in many circles, it's managed to avoid that level of government scrutiny in the United States since the FTC ruling.

But things are not going so well in England. The country's Department of Trade and Industry has filed a sealed complaint against the company, but has declined to specify any details. Amway responded by announcing that it is conducting a review of its business practices, and posted on its corporate blog some of the things its doing to shape up. The company is placing a 120-day moratorium on recruiting in Britain has banned sales of motivational tapes and literature not produced by the company. The sale of motivational materials has been a hot-button issue among Amway's critics, who charge that high-level Amway distributors get rich by selling motivational materials to naive recruits.

It will be interesting to see what happens here. An unfavorable outcome for the company in England could re-open the issue stateside.

Amway was also recently sued in California, with former distributors charging that the company is operating a pyramid scheme.

Shares of Mannatech (NASDAQ: MTEX) are down about 23%, making the shares the top decliner on the NASDAQ. The problem? According to the Wall Street Journal, "The Texas attorney general has asked a state court to bar Mannatech Inc. from allegedly illegal sales and marketing practices, saying the dietary supplement seller is falsely claiming its products cure, mitigate, treat or prevent diseases such as cancer, autism and Down's syndrome, in violation of state and federal laws."

You can read Attorney General Greg Abbott's complaint here. Mannatech has been under fire for months, after the Wall Street Journal ran an unfavorable piece on the company, exposing much of the same wrongdoing that the Texas lawsuit accuses the company of.

Like Amway and Usana Health Sciences (NASADAQ: USNA), Mannatech distributes its products through a multilevel marketing business model. Associates seek to recruit others into the fold, earning commissions on their sales, and the sales of those that they recruit.

According to Mannatech Chairman Sam Caster, "We walk the fine line of always stating our case appropriately and always training our people. We're not into the treatment, cure or mitigation of disease. We're into the improvement of quality of life ... everybody benefits from good nutrition."

Here's the problem. According to Mannatech's opportunity website (emphasis added):

Build your own home-based business and be your own boss! Whether you're looking for the potential of part-time extra income or a promising new career, Mannatech has an opportunity for you.

Enroll as an Associate to become instantly eligible for the level of commissions you wish to earn. Share what you learn with as few as six friends, and you can receive a commission on the products they purchase!

Mr. Caster can talk about "always training our people" but the fact is that no such training is required to distribute Mannatech products and recruit other distributors. Misrepresentation seems like a direct result of the nature of the business model.