Pyramid schemes come in many shapes
Published 2:03 pm Wednesday, February 21, 2001
By By DONNIE NUNLEY
APD Assistant Chief of Police
I'm sure you've seen them dozens of times. Messages, which purport to tell you how, for a relatively small investment, you can make huge amounts of money.
There are countless variations, but they all are based on the same fraudulent concept. With a typical pyramid scheme there are various ploys used to create an illusion of legality; some of these involve a set of "reports" which you buy from those above you, and sell to those below you.
Others instruct you to create a mailing list out of the names of people below you. Some describe the money exchanged as a "gift" or a "loan." There are even some software-based pyramid schemes, centered around a program which is distributed down the chain; the program keeps track of this list of people from which you must buy the "codes" to "unlock" the program, enabling you to create a version of the program which lists you as one of the sources from which others must buy these codes to unlock it.
In every case, the basic concept is the same – you pay a relatively small amount of money to a few people above you, with the expectation that later, a very large number of people will be making similar payments to you.
A deliberate effort is made, in many cases, to confuse prospective victims with regard to the distinction between a legitimate "multi-level marketing" (MLM) scheme, and an illegitimate pyramid scheme.
I'm no fan of MLM; I regard even "legitimate" MLM schemes as ethically questionable at best. But there is a vital distinction. The important distinction is this: with a legitimate MLM, you have a real product that is of significant value in and of itself. Most of your profit comes from the sale of the product to people who will use this product according to its own value and usefulness, and not just try to sell it to someone below them. Though MLM encourages you to build a "downline", so that you can make some profit by taking a cut of the sales made by those below you, you do not need to recruit even a single person below you in the pyramid in order to profit; you can profit by selling the product itself, even to people who have no interest in joining the MLM.
In those pyramid schemes which try to pass themselves off as MLM, your "product" is something that has very little inherent value, if any at all, beyond the requirement that one must buy it from you in order to join your "downline." The "product" must consist of worthless reports, or even electronic codes to unlock a software-based pyramid scheme. Nobody could buy these "products," except as part of joining the pyramid scheme itself. The only opportunity for profit is in getting people to join the pyramid in levels below you.
Keep in mind that a pyramid scheme is a scheme in which a hierarchy is created by people joining under others who joined previously, and in which 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. Pyramid schemes are prohibited by the laws of the United States of America, by the laws of each of the 50 individual states, and by laws of most other nations.
Pyramid schemes are variously defined under laws either as a form of gambling, or (more accurately, in my opinion) as outright fraud. 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 listed, remove the top name, and move all the other names up one position, and send it on to more people. Let us assume, that you get 10 people to join, and each of them gets 10 people, and so on. As the pyramid grows below you, here's what supposedly happens:
1. The first level below you has 10 people. They each send you a dollar, so you collect $10.
2. The next level has 100 people. (Each of your first 10 gets 10 more.) You get $100.
3. The next level has 1,000 people, so you collect $1,000.
4. The next level has 10,000 people, so you collect $10,000.
5. The level has 100,000 people, so you collect $100,000.
6. The next level has 1 million people, so you collect $1 million.
7. At this point, your name drops off the list, and you collect no more.
So, for your initial investment of $6, (one dollar to each of the six people above you), you collect a total of more than $1.1 million.
There are of course, many variations on this concept. It's very easy to understand how this kind of scheme should work. It all seems so simple and so obvious. It is, unfortunately, somewhat more difficult to understand why this kind of scheme does not work, and why it is unethical and dishonest, and, in most cases, very much illegal.
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. In a pyramid, no new wealth is created; the only wealth gained by the participant is wealth lost by other participants. The pyramid will collapse, and when it does, a solid majority of those who had joined will not have made any return at all. They will have paid their money to get in, but the promise that they will profit as people join below them will never be fulfilled.
As the old saying goes, "If it sounds too good to be true, it probably is." Anyone who tells you you can make huge amounts of money with very little investment and very little work is almost certainly not telling you the truth. Participating in any pyramid scheme or any other scheme, which promises you that you will get rich quickly, with little effort, is foolish at best. You will most likely only lose money to such a scheme, and you may even find yourself subject to legal prosecution for fraud. Be careful.