10b. Pyramid Programs, IUH 2009-12, 2ND Ed, R513A

Author Notes: Reference Copy, links to Original Copy removed due to the Age of the Content. See the top Blog Menu for Copyright Concerns, Some Content Removed.

Preface
Dr. Don, Founder ICFO

 

1.1      PYRAMID SCHEMES

Pyramid Schemes are not illegal in many parts of the world, but more countries are getting on onboard. You need to understand them to avoid them. See Speech Below

In the classic “pyramid” scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

 

The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. The chart below shows how pyramid schemes can become impossible to sustain:

NASecuritiesExchangeCommission(SEC)

 

 

 

FTC GUIDE TO PYRAMIDS

I would like to thank you for the opportunity to speak about the growing international problem of pyramid schemes. What is striking about these schemes is that while they are very old forms of fraud, modern technology has vastly multiplied their potential for harming our citizens. The Internet in particular offers pyramid builders a multi-lane highway to world-wide recruits in virtually no time.

WHAT IS A PYRAMID SCHEME AND WHAT IS LEGITIMATE MARKETING?

Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic.

 

They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.

 

There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company’s incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company’s distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements.

 

A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.

PONZI SCHEME

A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting, but in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new “members.” Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer standing members of the program.

 

In English, there is an expression that nicely summarizes this scheme: It’s called “stealing from Peter to pay Paul.” In fact some law enforcement officers call Ponzi schemes “PeterPaul” scams. Many of you may be familiar with Ponzi schemes reported in the international financial news. For example, the MMM fund in Russia, which issued investors shares of stock and suddenly collapsed in 1994, was characterized as a Ponzi scheme.

 

Both Ponzi schemes and pyramids are quite seductive because they may be able to deliver a high rate of return to a few early investors for a short period of time. Yet, both pyramid and Ponzi schemes are illegal because they inevitably must fall apart. No program can recruit new members forever. Every pyramid

 

 

 

or Ponzi scheme collapses because it cannot expand beyond the size of the earth’s population. When the scheme collapses, most investors find themselves at the bottom, unable to recoup their losses.

 

Some people confuse pyramid and Ponzi schemes with legitimate multilevel marketing. Multilevel marketing programs are known as MLM’s, and unlike pyramid or Ponzi schemes, MLM’s have a real product to sell. More importantly, MLM’s actually selling their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM’s may pay commissions to a long string of distributors, but these commission are paid for real retail sales, not for new recruits.

HOW PYRAMID SCHEMES OPERATE

Let’s look at how a pyramid scheme operates from three points of view: the potential investor, the promoter or con artist, and the victim. Many pyramid schemes will present a payout formula or matrix much like this one:

 

#       Payment of $500
Level 1 $150 x 3 = $450#             ##
Level 2 $30 x 9 = $270# # #      # # ## # #
Level 3 $30 x 27 = $810# # # # # # # # # # # # # # # # # ## # # # # # # # #
Level 4 $30 x 81 = $2430

——- $3960

etc. # # # # # # # # # # # # # # # # # # 

 

# # # # # # # # #etc.

 

 

 

This example illustrates what is known as a three by four matrix. Each investor pays $500 to the promoter and is told to build a “downline” by recruiting three new members, who then each should recruit three more members. The investor is told that he will be paid $150 for each of the three members whom he enlists at the first level. The investor is also promised $30 commissions for each recruit at the next three levels. Thus, the investor should receive commissions for four levels of recruits below him, each of whom must recruit three more members, hence the name — a three by four matrix. To the potential investor/recruit this may look like a very appealing opportunity. The pyramid promoter is likely to persuade the investor that he is “getting in early” and that he should consider himself at the top of the matrix. From this perspective, it appears that he can earn $3,960 on an investment of $500, a whopping 792 percent return.

VICTIMS

Now consider the pyramid from the investor/victim’s perspective — after the entire scheme has collapsed around him. The victim, like the first investor, thought of himself at the top of the pyramid

 

 

 

but suddenly realizes that he is actually at the bottom, unable to find people interested in the program to build out his downline. He is not alone because mathematics shows that MOST investors will find themselves at the bottom of the pyramid when it collapses. The very structure of this matrix dictates that whenever the collapse occurs, at least 70 percent will be in the bottom level with no means to make a profit.

A Ponzi scheme could yield even worse results for investors, because it does not pay out any commissions at all. This can have disastrous consequences, as exemplified by Charles Ponzi’s infamous fraud in the 1920’s. Charles Ponzi, an engaging ex-convict, promised the Italian American community of South Boston that he would give them a 50 percent return on their money in just 45 to 90 days.

 

Mr. Ponzi claimed that he could pay such a high rate of return because he could earn 400 percent by trading and redeeming postal reply coupons.

 

These coupons had been established under the Universal Postal Convention to enable a person in one country to pre-pay the return postage on a package or letter sent back from another country. For a short time after World War I, fluctuations in currency exchange rates did create a disparity between the cost and redemption value of postal reply coupons among various countries.

 

However, Mr. Ponzi discovered that he could only make a few cents per coupon and that handling large volumes of coupons cost more than they were worth. He stopped redeeming any coupons but continued to collect investors’ money.

 

When he actually paid a 50 percent return to some early investors, his reputation soared and more money flowed in from around the country. Mr. Ponzi bought a stylish house in the best part of town and purchased a large minority interest in his local bank, the Hanover Trust Company.

Eventually his scheme began to unravel, bringing ruin to the bank and thousands of investors. When

 

Mr. Ponzi began to overdraw his accounts at Hanover Trust, the Massachusetts Banking Commissioner ordered Hanover Trust to stop honoring Ponzi’s checks. The bank refused and even issued back-dated certificates of deposit to cover Mr. Ponzi’s overdrafts. A few days later, the Banking Commission took over Hanover Trust, and Mr. Ponzi was arrested for mail fraud. In the end, Charles Ponzi owed investors over $6 million, an enormous sum of money for that time. He was convicted of fraud in both state and federal court and served ten years in prison.

AMWAY CORP

In re Amway Corp., another landmark decision from the 1970’s, the FTC distinguished an illegal pyramid from a legitimate multilevel marketing program. At the time, Amway manufactured and sold cleaning supplies and other household products. Under the Amway Plan, each distributor purchased household products at wholesale from the person who recruited or “sponsored” her. The top distributors purchased from Amway itself. A distributor earned money from retail sales by pocketing the difference between the wholesale price at which she purchased the product, and the retail price at which she sold it. She also received a monthly bonus based on the total amount of Amway products that she purchased for resale to both consumers and to her sponsored distributors.

 

 

 

 

Since distributors were compensated both for selling products to consumers and to newlyrecruited distributors, there was some question as to whether this was a legitimate multilevel marketing program or an illegal pyramid scheme. The Commission held that, although Amway had made false and misleading earnings claims when recruiting new distributors, the company’s sales plan was not an illegal pyramid scheme.

Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front “head hunting” or large investment fee from new recruits, nor did it promote “inventory loading” by requiring distributors to buy large volumes of nonreturnable inventory. Instead, Amway only required distributors to buy a relatively inexpensive sales kit.

 

Moreover, Amway had three different policies to encourage distributors to actually sell the company’s soaps, cleaners, and household products to real end users.

 

First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month — a policy known as the 70% rule. Finally, Amway required each sponsoring distributor to make at least 1 retail sale to 10 different customers each month, known as the 10-customer rule.

 

The Commission found that these three policies prevented distributors from buying or forcing others to buy unneeded inventory just to earn bonuses. Thus, Amway did not fit the Koscot definition: Amway participants were not purchasing the right to earn profits unrelated to the sale of products to consumers “by recruiting other participants, who they are interested in recruitment fees rather than the sale of products.

PYRAMID SCHEMES IN THE 1990’S

The 1990’s first brought an important refinement in the law. As the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards — the inventory buy-back policy, the 70% rule, and the 10 customer rule — that were found acceptable in Amway.

 

However, an appellate court decision called Webster v. Omnitrition Int’l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the “70% rule” and “10 customer rule” are meaningless if commissions are paid based on a distributor’s wholesale sales (which are only sales to new recruits), and not based on actual retail sales. The court also noted that an inventory buy-back policy is an effective safeguard only if it is actually enforced.

While new cases were refining the law in the 1990’s, radical changes were underway in the marketplace. Pyramid schemes came back with a vengeance. Like most economic activity, fraud occurs in cycles, and new pyramid schemes exploited a new generation of consumers and entrepreneurs that had not witnessed the pyramid problems of the 1970’s.

 

 

 

Also, the globalization of the economy provided a new outlet for pyramiding. Pyramids schemes found fertile ground in newly emerging market economies where this type of fraud had previously been scarce or unknown.

 

In Albania, for example, investors poured an estimated $1 billion into various pyramid schemes — a staggering 43% of the country’s GDP.

 

In the U.S., probably nothing has contributed to the growth of pyramid schemes as much as Internet marketing. The introduction of electronic commerce has allowed con artists to quickly and cost- effectively target victims around the globe.

 

After buying a computer and a modem, scam artists can establish and maintain a site on the World Wide Web for $30 a month or less, and solicit anyone in the world with Internet access. Pyramid operators can target specific audiences by posting messages in specialized news groups (e.g., “alt.business.home” or “alt.make.money.fast”). In addition, through unsolicited email messages — known on the Internet as “spam” — pyramid operators can engage in cheap one-on-one marketing.

 

Whereas it might cost hundreds or thousands of dollars to rent a mailing list and send 10cent post cards to potential recruits, it costs only a fraction of that to send out similar email solicitations. On the Internet, you can acquire one million email addresses for as little as $11 and spend nothing on postage. The Federal Trade Commission’s current law enforcement efforts reflect this new wave in pyramiding. The Commission has brought eight cases against pyramid schemes in the last two years, and six of those have involved Internet marketing. One recent case, FTC v. FutureNet, Inc., is particularly instructive because it starkly reflects the potential for abuse in hi-tech and newly deregulated industries. FutureNet allegedly claimed that, for payment of $195 to $794, investors could earn between $5000 and $125,000 per month as distributors of Internet access devices like WebTV.

 

The FTC filed suit, charging that FutureNet’s earnings claims were false because the company really operated an illegal pyramid scheme. Near the time of filing, FTC investigators discovered that FutureNet had begun to sell electricity investments as well, riding a wave of speculation in advance of the deregulation of California’s electricity market. The Commission obtained a TRO and an asset freeze over the defendants’ assets and eventually reached a $1 million settlement with the corporate defendants and two individual officers.

 

The settlement requires the defendants to pay $1 million in consumer redress, bars them from further pyramiding activity of any kind, requires them to post a bond before engaging in any network marketing, and requires them to register with state utility officials before engaging in the sale of electricity. The Commission continues to litigate its case against three non-settling individual defendants.

CONSUMER EDUCATION

Law enforcement is the cornerstone of the Commission’s fight against pyramid schemes; however, we also try to educate the public so that they can protect themselves. In our educational efforts, we have

 

 

 

tried to take a page from the con artists’ book and use new online technology to reach consumers and new entrepreneurs.

 

For example, on the agency’s web site at “www.ftc.gov“, the Commission has posted several alerts regarding pyramid schemes and multilevel marketing problems. The Commission records over 2 million “hits” on its home page every month and receives several thousand visitors on its pyramid and multilevel marketing pages.

The staff of the Commission also has posted several “teaser” web sites, effectively extending a hand to consumers at their most vulnerable point — when they are surfing areas of the Internet likely to be rife with fraud and deception. The “Looking for Success” site is one example. It advertises a fake pyramid scheme. The home page of “Looking for Success” promises easy money and talks in glowing terms about achieving “financial freedom.” On the second page, the consumer finds a payout plan common to pyramid schemes, as well as typical buzz words like “forced matrix,” “get in early,” and “downline.” Clicking through to the third and final page in the series, however, brings the consumer to a sobering warning: “If you responded to an ad like this one, you could get scammed.” The warning page provides a hyper-text link back to FTC.GOV, where consumers can learn more about how to avoid pyramid schemes.

LOOKING AHEAD

Unfortunately, pyramid schemes are likely to continue to proliferate both here and abroad in the near future. However, we can all help stem the tide by working together. Finally, you can encourage the relevant officials in your countries to combat pyramid schemes by educating consumers and businesses about how to recognize and avoid this type of fraud. This can be particularly important in emerging markets, where experience with investment opportunities may be scarce.

 

1.2       MULTI-LEVEL MARKETING PROGRAMS

The benefit of multilevel marketing could be also known as multilevel earnings. A single avenue of earning is you selling your product or service results in a one-time sale. There are no residual benefits to you unless you have a store such as ClickBank will you possible earn an additional sale of the same customer. Adding a multiple tier opportunity enables you to gain earning from your downline, perhaps one level or more – giving you greater and perhaps residual earnings from your one time sale.

 

In another Pay per Click or Pay to Read Section, you will see that those sites that actually pay you, pay your very little and the only way to make any real income, is to get paid from your work and the work of others – your downline.

 

The likelihood of a top guru joining your affiliate or MLM site is nil, because they can make their own sites faster that you can join them. So you either take your time and slowly build your downline, or you create your own site with enough content and value, that perhaps your will attract a Joint Venture partner, or o a top performance joins under you and brings his or her downline with them. For one opinion on the differences, see the following video

 

 

 

MLM VERSUS AFFILIATE MARKETING

An interesting MLM versus Affiliate Video. (Subtle selling vs. recruiting and selling) Also discusses Cash Gifting Programs and Pyramids Scheme – Legal issues. Do your homework. Limited money made from 2 tiers, 98% do not make money. Worth seeing! Search for 2 create a website and you will find a very aggressive and successful lady. See the difference ways she advertises from blogs to videos. MLM and Affiliates Marketing, Difference Between Affiliate Marketing and MLM

 

This site wants your direct view so we cannot publish the article, but we can link to the article. Link only site. AffiliatesSeeking.com is a good source of information on this subject and others.

IS IT MLM OR A PYRAMID?

 

TIP: Without your Due Diligence to check out a program before you spend your money, you may be at risk of participating in a pyramid scheme

 

Multilevel marketing plans, also known as “network” or “matrix” marketing, are a way of selling goods or services through distributors.

 

These plans typically promise that if you sign up as a distributor, you will receive commissions — for both your sales of the plan’s goods or services and those of other people you recruit to join the distributors. Multilevel marketing plans usually promise to pay commissions through two or more levels of recruits, known as the distributor’s “downline.”

 

If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as “pyramiding.” State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.

WHY IS PYRAMIDING PROHIBITED?

Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people — except perhaps those at the very top of the pyramid — lose their money.

 

The Federal Trade Commission cannot tell you whether a particular multilevel marketing plan is legal. Nor can it give you advice about whether to join such a plan. You must make that decision yourself. However, the FTC suggests that you use common sense, and consider these seven tips when you make your decision:

 

Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.

 

Beware of plans that ask new distributors to purchase expensive inventory. These plans can collapse quickly — and also may be thinly-disguised pyramids.

 

 

 

Be cautious of plans that claim you will make money through continued growth of your “downline” — the commissions on sales made by new distributors you recruit — rather than through sales of products you make yourself.

 

Beware of plans that claim to sell miracle products or promise enormous earnings. Just because a promoter of a plan makes a claim doesn’t mean it’s true! Ask the promoter of the plan to substantiate claims with hard evidence.

 

Beware of shills — “decoy” references paid by a plan’s promoter to describe their fictional success in earning money through the plan.

 

Don’t pay or sign any contracts in an “opportunity meeting” or any other high pressure situation. Insist on taking your time to think over a decision to join. Talk it over with your spouse, a knowledgeable friend, an accountant or lawyer.

 

Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you’re considering — especially when the claims about the product or your potential earnings seem too good to be true.                                                                                      FedTradeCommission

LOTIONS AND POTIONS: THE BOTTOM LINE ABOUT MLM PLANS

Lose weight! Firm up!

Look better! Live longer!

 

‘Tis the season for consumers to be confronted with a wide range of health, beauty and fitness products and promotions. Many of these items aren’t available on store shelves and are sold only through distributors.

WHAT ARE YOU BUYING?

Many companies that market their products through distributors sell quality items at competitive prices. But some offer goods that are overpriced, have questionable merits or are downright unsafe to use.

 

The Federal Trade Commission warns consumers to apply a healthy dose of caution before buying products advertised as having “miracle” ingredients or techniques and guaranteed results. Many of these “quick cures” are unproven, fraudulently marketed and useless or even dangerous. Before using one of these products, the best prescription may be to check with a health professional.

WHAT ELSE IS FOR SALE?

Some distributors sell more than diet and exercise plans, vitamin supplements or wonder creams. Many may sell “opportunities,” too-a chance for you not only to buy, but also to market, the products. In addition to describing the benefits of their product or program, these distributors may encourage you to become a distributor.

 

 

 

If you sign up as a distributor, you may be promised commissions or other rewards-for both your sales of the plan’s goods or services and those of other people you recruit to become distributors. These plans, often called “multilevel marketing plans,” sometimes promise commissions or rewards that never materialize. What’s a worse, consumer are often urged to spend or “invest” money in order to make it.

WATCH OUT FOR PYRAMIDS

Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They are actually illegal pyramid schemes.

 

Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people- except perhaps those at the very top of the pyramid-end up empty-handed.

HOW TO EVALUATE A PLAN

If you’re thinking about joining what appears to be a legitimate multilevel marketing plan, take time to learn about the plan before signing on.

What’s the company’s track record? What products does it sell?

How does it back up claims it makes about its product? Is the product competitively priced?

Is it likely to appeal to a large customer base?

What up-front investment do you have to make to join the plan?

Are you committed to making a minimum level of sales each month?

Will you be required to recruit new distributors to be successful in the plan?

Use caution 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. No matter how good a product and how solid a multilevel marketing plan may be, expect to invest sweat equity as well as dollars for your investment to pay off.

YOUR RESPONSIBILITIES

If you decide to become a distributor, remember that you’re legally responsible for the claims you make about the company, its product and the business opportunities it offers. That applies even if you’re simply repeating claims you read in a company brochure or advertising flyer.

 

When you promote the qualities of a product or service, you’re obligated to present those claims truthfully and to ensure there’s enough solid evidence to back them up. 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.

 

Likewise, if you decide to solicit new distributors, be aware that you’re responsible for any claims you make about a distributor’s earnings potential. Be sure to represent the opportunity honestly and to avoid making unrealistic promises. If those promises fall through, remember that you could be held liable. FedTradeCommission

 

 

ND Ed, R513A

Dr Don, Founder, ICFO

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