How To Avoid Pyramid Schemes
Pyramid schemes are in the news, and people don’t know what they are or how to avoid them. The SEC recently shut down TelexFree for being a Ponzi-scheme. People in our community lost money in that one. Herbalife is still going strong (watch the green store fronts), but it was accused by investor Bill Ackman of being an illegal pyramid scheme.
First, a Ponzi scheme is purely an investment scheme, where the earlier investors are being paid from investments by later investors, because the business is not generating sufficient (or any) returns. Pyramid schemes are tougher because they’re not an investment, but a “business opportunity,” and you have to work to make money—selling and recruiting other participants. So when you lose money you only have yourself to blame, or so they say. As a result, people do not file complaints when they lose money—they blame themselves, and law enforcement ignores the problem if nobody complains.
Pyramid schemes typically explain to you they are not pyramid schemes because they offer a viable retail business. You can sell the product all day long, or so they say, but the product is usually over-priced. So sales are difficult and people give up. Sometimes they use the product for a while because they think they get a wholesale discount, but eventually, they quit, unless they learn how to recruit others, but recruit others into what? The ‘opportunity’ to sell an overpriced product? Or the opportunity to recruit others, ad infinitum? If the money is in recruiting you have a pyramid scheme.
The original idea of a pyramid scheme was just a recruiting game, and it was very lucrative for the people who started it. That was made illegal, hence the name “illegal pyramid.” Today, most of the time pyramid schemes take the form of Multilevel Marketing (MLM). Since they can be tough to prosecute, it can take a long time before these companies are shut down by regulators. Amway has settled many lawsuits, and famously survived a legal challenge in 1979, surviving only because of a requirement of ten retail sales per month, and some other rules. Everybody claimed to make ten sales a month. Other MLMs followed suit. It was impossible for the regulators to verify so MLM continued unchecked.
To use an analogy: someone gets a speeding ticket for going 85 in a 55 mph zone, driving a sports car capable of 200 mph. The driver convinces the judge to throw out the ticket because the car is electronically limited so it can only do 150 mph. In the case of the ‘79 Amway ruling, then judge Timony accepted the restriction, not realizing that it would not prevent the car from going 85 miles an hour anyway. The restriction meant nothing, and Amway continued unabated, and the rest of the MLM industry along with it.
In short, all MLMs since then have operated in a legal vacuum, and a serious prosecutor could shoot them down, if they wanted. This may be happening with Herbalife. At the end of 2012 investor Bill Ackman sold Herbalife short to the tune of $1 billion, and in December he did a presentation on the issue. Pershing Square has a website documenting the case, www.herbalifepyramidscheme.com. On July 22, 2014, Ackman gave another presentation on the so-called Nutrition Clubs (those little green storefronts), which he claims are a pyramid within a pyramid, sort of like Russian dolls, and provided their documentation to regulators.
Meanwhile, our Council Member in District 18 of the Bronx, Annabel Palma, has encouraged New York State Attorney General Eric Schneiderman to investigate the company, because she has seen first hand that the weakest members of society are being targeted with the false promise that by buying overpriced weight-loss shakes, you will end up one day making $500,000 per year in their “President’s Club.”
In other words, if an MLM does not have a viable retail business, it is most likely an illegal pyramid, and if enough people file complaints and can prove their losses, then prosecutors can also act. By the same token an MLM company is not “legal” simply because it has not yet been prosecuted and or shut down. When the proposition involves you investing money, in terms of fees to join and/or over priced products, that is almost a guarantee it is a pyramid scheme, and in general, when there are claims of “unlimited income potential” these are guaranteed exaggerations that are ultimately illegal. Causing people to spend or invest money with lies is a fraud, regardless if it is prosecuted or not. You don’t have to wait for the proof. You can just say “No!” today.