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A
Pyramid Scheme is a multi-level marketing (MLM) program that
cannot support itself because earning money, and/or advancing
within the system depends on recruiting other people into
the operation, rather than selling a product or providing
a service. A person is generally (but not always) required
to pay an upfront fee to participate.
Note
that although all Pyramid Schemes are multi-level marketing
programs, all MLM programs are not necessarily Pyramid Schemes.
The distinction lies in the source of revenue, and the independent
viability of the underlying enterprise. The fundamental issue
is, does the operation need the financial contributions of
new members to survive, or can it stand on its own?
As
an investigator, you must be able to explain “why”
this sort of scheme is not legal to laymen who may not, depending
upon the complexity of the program, see the problem. You do
that by using a basic illustration that anyone can understand
and then applying that model to your case.
The
common chain letter is the most basic illustration of a Pyramid
Scheme. Suppose I send you (and tens of thousands of others)
a list of ten names and addresses along with a letter offering
you an opportunity to realize windfall profits by sending
each of the people on the list (let’s call them P1 –
P10) a measly dollar each (CASH ONLY), for the privilege of
participating in my “program.” I am person P10
on the list.
My
letter goes on to explain that you, in turn, do as I did -
delete P1 from the list, move everyone else up one space and
put your name in my P10 position. You then send your list
out to as many as you wish, with a photocopy of the letter
containing the instructions.
The
letter assures you that this is a real money maker, some of
the people toward the top of the list have bought new houses,
and one of the guys bought a Lamborghini a couple of months
after he joined. Chain letters and other Pyramid Schemes typically
include testimonials from fictitious people, or “shills”
who brag about their experience. The encourages you to participate
and describes a model where all you must do is sign on 10
people in your “downline” who each recruit ten,
and so on. Here is what the letter says you will get for your
$10.00 investment by the time your name falls off the list.
-
Initially,
you receive $10 from your ten people – we call them
Tier 1 since they are the top tier in your personal pyramid.
They see you as P10 and, “right off the bat, you
made your investment back but nobody says you gotta stop
there!”
-
You
then expect to receive $100 from the ten people recruited
by each person in Tier 1. We call these people Tier 2
and they see you as P9. “Pretty good huh, in a matter
of a few days, you recovered your initial investment and
sat back to see $100 in pure profit roll in! It gets better.”
-
You
can expect to receive at least $1000 from the people in
Tier 3 since the guys at Tier 2 will be at least as diligent
as you were in recruiting new folks – surely they
will sign on at least ten and the more they sign on, they
more we all make. “You’re just getting started,
use that $1000 as the down payment on the car of your
dreams dude – you’re at P8 with seven full
cycles to go!”
-
By
the time you get that new car home, and probably before
you make your first payment, Tier 4 will be raining dollar
bills on you to the tune of $10,000. “Imagine, you
made $11,100 in a matter of weeks from a total investment
of $10!”
-
The letter goes on to explain (with lots of hype that
I won’t continue to bother with here) that Tier
5 sees you as P6 paying you $100K; Tier 6 sees you as
P5 paying you $1M; Tier 7 pays you $10M as P4; Tier 8
pays you $100M as P3; Tier 9 pays you $1B as P2 and Tier
10 pays you $10B as P1 and you’re off the lists.
“Ok,
any fool can see that you’ll make a profit of $1,111,111,100
if the people in your downline just manage to recruit ten
people – with just a ten people turn around, the money
will come pouring in and all it costs you is $10 and ten stamps.
Here’s the really important part – this is all
strictly legal because all I am guaranteeing is that YOU will
make YOUR investment back if YOU recruit 10 people and that
is all you will be guaranteeing them by giving them a copy
of this letter which has been approved and endorsed by the
Post Master General, the United States Attorney’s Office
and Barbara Bush!
Now
I’m not trying to make you believe in “pie in
the sky,” neither of us really believes that you are
actually going to become a billionaire ten times over by investing
a mere $10 – life doesn’t really work like that.
The potential is there, but realistically, nobody expects
to make more than a few hundred thousand and you may not even
make that much. Other than the people you recruit, you are
counting on other people to make you successful just as I
am counting on you.
On
the other hand, you are in control of recovering your investment
and you know you can do that right away. What have you got
to lose?”
As good as it sounds, here’s the hitch. While the letter
keeps reminding you to think in terms of ten people, look
at the big picture. It will require more than one billion
people to fill the tenth tier in your pyramid and those people
must lose their investment because it would take 10 billion
people to fill the eleventh tier and there are not that many
people on the planet.
No matter how you look at it, a Pyramid Scheme is a fraud
on somebody. It has to be, since the system relies upon the
distribution of a valuable consideration, ongoing distribution
requires a rapidly growing list of participants and nothing
of value is created anywhere in the process.
That
is the key to identifying a Pyramid Scheme – does the
system’s growth, prosperity and survival depend upon
the value it creates, or is the value contributed by today’s
recruits distributed to pay those who were recruited yesterday?.
Participants
in “chain letters” are aware of their role in
the scheme. It is obvious to anyone that there is no underlying
product, today's investors pay for their place on the pyramid
and then solicit tomorrow's investors. Each becomes the head
of their own personal pyramid, thereby exposing themselves
to criminal culpability and civil penalty.
Investigation
often reveals that the first ten names on the list are aliases
used by the same person who controls the post office boxes
or mail drops where the money is to be sent. That individual
sends the list and accompanying letter to thousands of recipients.
Unlike checks, a dollar bill sent to “Joe Schmoe”
has cash value to whomever actually controls the box.
Pyramid
promoters do not usually limit themselves to soliciting dollar
bills. A look at Prosper International League's Galaxy Plan,
as it was formerly hyped on the Internet, is a classic example
of a “bare bones” Pyramid Scheme that required
a significant investment to participate. As a consequence
of our investigation, the various web sites that promoted
this scheme are inactive, but a “Google” search
will enable you to view cached pages.
As previously stated, the chain letter serves as the basic
Pyramid Scheme model for purposes of illustration. Most Pyramid
Schemes are substantially more complex, in that they are constructed
to look like a multi-level marketing (MLM) operation such
as Amway, where people buy in, and then benefit from their
product sales and the sales of those that they recruit into
the operation. In these cases, the only people who realize
that the operation is a scam are those at the top of the pyramid;
the other investors believe that they are involved in some
sort of legitimate MLM enterprise.
A
scam of this nature rocked the state of Kansas in the mid
1980's. In this scam, Activator Supply Company sold ''activator
kits'' to investors that would allow them to grow milk-based
bacteria cultures for resale to “Culture Farms”
who, according to the marketing hype, processed them and sold
them to “Cleopatra's Secret” who used them to
make cosmetics.
This
was a dream come true for anyone wanting to make a good living
from home, everyone who joined was paid as promised and every
single mom in Kansas frantically worked, borrowed or begged
to raise the money necessary to buy the “activator kit”
necessary to join the program. It was a real moneymaker until
regulators shut them down.
Investigators
determined that the program was a hoax - there was no existing
market for the cultures that these home based entrepreneurs
were growing. The companies involved were empty shells and
no cosmetics were actually produced. The system was set up
like a circle where the “cultures” the people
grew and sent to “Culture Farms” were returned
to the Activator Supply, Co. to be resold as “activator
kits.”
The
people who invested had no idea – although they were
making money, and lots of it, they had no way to know that
the money they made was taken directly from the investments
of subsequent investors.
This
case is a classic example in which the entire scheme is exposed
when you peek behind the curtain. If you visualize how this
system worked, you will understand Pyramid Schemes
Although
it is often asserted that the social security program is a
classic example of a Pyramid Scheme, this is not the case.
People do not buy into the SS program believing that they
can entice their friends to join and realize a major return
on their investment and, unlike the classic pyramid, the SS
program is not necessarily doomed to collapse since the government
requires participation and the government can subsidize it
as necessary.
I welcome
your comments,
questions and suggestions.
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