Pyramid
Schemes on the Internet
Be wary of
messages that read: "How to Make Big Money From
Your Home Computer!!!" One online promoter claimed that investors could
"turn $5 into $60,000 in just three to six weeks." In reality, this
program is nothing more than a classic "pyramid" scheme.
A pyramid
scheme is a scheme in which a hierarchy is created by people joining under
others who joined previously, where those who join, make payments to those
above them in the hierarchy, with the expectation of being able to collect
payments from those who join below. All pyramid schemes rely on
increasing numbers of unsuspecting investors to buy into the bottom of the
chain in hopes of taking money out once they reach the top. Because e-mail is
practically instantaneous, relatively anonymous and incredibly cheap, it is an
almost ideal vehicle for this type of scam. Like other scams, a pyramid scam
may promise rates of return that seem just too good to be true for little or no
effort on your part, or it may initially be vague about what your initial
investment will go toward. What happens in a pyramid scheme is that existing
investors are paid a return based on the promoters’ ability to raise new funds;
once the fund raising stops, later investors cannot be repaid and the pyramid
collapses.
These schemes
always cheat most of the participants. Most people who participate in these
pyramid schemes lose, because sooner or later, no new participants can be
recruited to keep the scheme going. Posters who start these threads claim it
will work if everyone is "honest." In fact, with the usual
send-this-message-to-five-people scheme, it only takes 15 steps in the scheme
before the total number of participants must be 7.6 billion -- larger than the
Earth's population -- in order for the scheme to continue.
Let's look at
a hypothetical pyramid scheme, with respect to how it is claimed to work.
Suppose the list included in this scheme contains six names. You are to
send a dollar to each person listed, remove the top name, move all the other
names up one position, and send it on to more people. Let us assume, that you get ten people to join, and each of them gets
ten people, and so on.
As the pyramid
grows below you, here is what supposedly happens:
It's very easy
to understand how this kind of scheme should work. It all seems so
simple and so obvious. The truth is, this scheme does
not work, except for those who get in at the first few levels. The vast
majority of participants in such a scheme will only lose their original
investment, and make no profit at all.
How to
Avoid Being a Victim of Pyramid Schemes
Some
multilevel marketing plans are legitimate. However, others are illegal pyramid
schemes. In pyramids, commissions are based on the number of distributors
recruited. Most of the product sales are made to these distributors - not to
consumers in general. The underlying goods and services, which vary from vitamins
to car leases, serve only to make the schemes look legitimate.
Joining a
pyramid is risky because the vast majority of participants lose money to pay
for the rewards of a lucky few. Most people end up with nothing to show for
their money except the expensive products or marketing materials they are
pressured to buy.
If you're
thinking about joining what appears to be a legitimate multilevel marketing
plan, take time to learn about the plan. What's the company's track record?
What products does it sell? Does it sell products to the public-at-large? Does
it have the evidence to back up the claims it makes about its product? Is the
product competitively priced? Is it likely to appeal to a large customer base?
How much is the investment to join the plan? Is there a minimum monthly sales
commitment to earn a commission? Will you be required to recruit new
distributors to earn your commission?
Be skeptical
if a distributor tells you that for the price of a "start-up kit" of
inventory and sales literature - and sometimes a commitment to sell a specific
amount of the product or service each month - you'll be on the road to riches.
Often consumers spend a lot of money to "build their business" by
participating in training programs, buying sales leads or purchasing the
products themselves. Too often, these purchases are all they ever see for their
investments.
If you decide
to become a distributor, you are legally responsible for the claims you make
about the company, its product and the business opportunities it offers. That
applies even if you're repeating claims you read in a company brochure or
advertising flyer. The Federal Trade Commission advises you to verify the
research behind any claims about a product's performance before repeating those
claims to a potential customer.
In addition,
if you solicit new distributors, you are responsible for the claims you make
about a distributor's earnings potential. Be sure to represent the opportunity
honestly and avoid making unrealistic promises. If those promises fall through,
remember that you could be held liable.
Do not be
fooled if the scheme includes some form of "reports" or lists or
other pieces of "information" that you are supposedly buying from
those above you, and selling to those below you. In nearly every case,
these intangible products have no value imputed to them, other than that which
can allegedly be gained by copying and reselling them. The purpose of
these reports is not to provide valuable information, but to provide a pretext
by which one participant in a pyramid scheme collects money from other
participants.
Damages
The amount
lost in these types of schemes is dependent upon the amount invested. Those in
the lower ranks of a pyramid scheme pay less than those in the upper levels of
the pyramid who stand to lose more.
Pyramid
schemes produce no goods of any significance, and they provide no
service. They create no wealth. All they do is move existing
wealth. Every dollar that one person gains through such
a scheme is a dollar that someone else has lost.
Legalities,
Laws & Repercussions
Pyramid
schemes are prohibited by the laws of the
Participants
of pyramid schemes are viewed as people involved in illegal activity rather
than as victims. Most perpetrators accused of this type of scheme are typically
charged with the felony crime of commercial gambling. Perpetrators may also be
brought up on misdemeanor charges for the solicitation of a pyramid club,
punishable by time in jail and/or a fine.
Settlements in
pyramid scam cases often times prohibit defendants from ever engaging in any
other pyramid or marketing scheme in which a person derives income primarily
from recruiting others into the program. The defendant’s assets are typically
frozen by the court and placed under the authority of a receiver who will
implement a redress plan. These settlements also prohibit the release of
consumers’ names that were recruited to join the pyramid scheme.
Security
& Prevention
Be aware of
posters that claim pyramid schemes are completely legal, claiming they are mailing
lists or recipe services. These posters may even cite Title 18, sections 1302, 1341, 1342, and 1343 of the
"Postal Lottery Laws." These sections are part of the U.S. Code. I'm
sure that none of these people have actually read them, because they do not authorize
pyramid schemes. In fact, these are the very laws that make pyramid schemes
illegal.
All
responsible Internet sites have developed policies against posting pyramid
schemes. Users are typically notified of these policies when given an account.
Some of the people affected and/or offended when a pyramid scheme has been
posted will send copies to your site. Your system administrator may let you off
with a warning, but you could have your Internet access suspended or revoked.
If posting from school or work, users could be disciplined for using the
institution's computers to post pyramid schemes.
In addition,
the FTC has published a free brochure, "Profits in
Pyramid Schemes? Don't Bank On It,"
that warns that consumers should:
The Better
Business Bureau gratefully acknowledges the work of the faculty and students at
St. John Fisher College who developed this
information for use by the BBB.
This information
is general in nature and is not intended as a reliability report on any
company, product, or service.