If you think pyramid schemes are a thing of the past, you’d unfortunately be wrong. Just last year, six British women were convicted for their “Give and Take” operation, which stole more than £20m (30.5M in US dollars) from 10,000 investors and preyed upon vulnerable women. It’s another stark reminder of the tireless schemers out there preying on people’s innate desires to “get rich quick.” The problem is, while each scheme has its own creative way of getting you to buy in, the scammers are just reworking an age-old model.
It’s always tough to discern legitimate franchises from multi-level marketing scams – where applicants pay “business owner” buy-in fees then have to purchase the products, materials and services on top of that, putting the onus on them to make that money back. The gist of the schemes carry a common thread: recruiting “salespeople” earns more rewards then selling.
Over the years, “pyramid scheme” has become a catchall phrase for frauds and scams of all sorts, but it’s really a particular type of illegal business with a specific structure. We’ve already taken a look at Ponzi schemes and investment scams, and now it’s time to look at pyramid schemes that ended with their founders in jail or heavily fined.
The scheme’s original advertisements
Who wouldn’t want to own a music store? Founded in 2004 at the height of illegal downloading, BurnLounge offered the opportunity to 30,000 people including major label musicians. The deal was simple enough: open up a storefront through your own page. But unlike streaming sights like MySpace or PureVolume, “record store owners” were required to pay a subscription fee. Oh, and those who sold songs through their stores were paid in points that could be redeemed for BurnLounge products only. If you wanted to exchange your sale points for real money, that would cost you an extra fee.
Ultimately, the whole pay-for-the-right-to-sell and earn bonuses for recruiting members caught the eyes of the FTC and earned the site a hasty shutdown order. Operators were ordered to pay US$17 million to refund the consumers that got burnt.
Business in Motion
A key indicator you might be embroiled in a pyramid scheme is when the name of your company has nothing to do with what you’re selling. In the midst of 2008 recession, cash-strapped Canadians were offered a chance to make up to $100,000 by upselling “dirt cheap” vacation club packages. The catch – there was a $3,200 entrance fee for the travel club dubbed UltraLife but they would be paid a $5,000 commission for every package sold. A group of 2,000 investors duped by the Mississauga-based Business in Motion launched a class action lawsuit and were awarded $6.5 million. The man behind the alleged pyramid scheme, Alex Klippax, could face deportation back to the U.K.
Fortune Hi-Tech Marketing
Sounds legit right? Unfortunately, Kentucky-based Fortune Hi-Tech Marketing – which recruited people to sell products made by Dish Network, cellphone providers, Frontpoint Home Security and health and beauty products – was deemed a pyramid scheme in 2013 and shuttered by the Federal Trade Commission. Bearing all the classic marks of a pyramid scheme, salespeople made more money from recruiting then they did from selling. The FTC estimated more than 350,000 people in the United States, Puerto Rico and Canada bought into the scheme, paying $100 to $300 in annual fees with additional payments to get access to “higher sales commissions and recruiting bonuses. The outcome – FHTM operators were banned from participating in multi-level marketing and forced to pay U.S. $7.75 million in assets back to consumers duped by the scheme.
Irish Liberty/Speedball scheme
In the mid-2000s a scam swept through Ireland where people were asked to invest €10,000 (around $14,000) and entice other friends to invest. The money was paid to a “headquarters” in Germany to get around Irish tax laws. Investors were told they’d get €80,000 when they went to Germany to collect their profits. Altogether, the scammer pulled in over $28 million off those who bought into the scheme. The pyramid scam lured enough people to inspire the Irish government to boost its laws for those behind schemes like Liberty – imposing fines up to $140,000 and prison time.
United Sciences of America
Like countless other examples of pyramid schemes, United Sciences of America ran a diversified portfolio, hawking nutritional supplements like Master Formula and Calorie Control Formula through 140,000 distributors and even included a celebrity endorsement by William Shatner. The scheme, initially developed by Dallas businessman Robert Adler and run in the 1980s, preyed on the fears of the era like AIDS and cancer, promising to help protect those who took them. NBC news ran an expose on the company pointing to fraudulent claims and sketchy advertising. It was also discovered that the company’s 16-member advisory board, were paid consulting fees from $5,000 to $20,000 and some were given up to $100,000 in research grants. The whole thing came crashing down in 1987 when three U.S. states told the company to change their claims. High profile advisors left the board, distancing themselves from the company and claiming their information and quotes were co-opted by the company without their permission.
Despite all the perpetrators put in jail or heavily fined, there are always people scheming for a quick buck, and it’s important to isolate and stop them before they poison the wider economy and wreck lives.