Pyramid Schemes

April 1st, 2014 by Attorney Dan Carman

Say “pyramid scheme,” and many people immediately think of a business like Mary Kay (beauty products), Pampered Chef (kitchen tools), or Amway (purveyor of a variety of products)—all multilevel marketing programs. But there is a difference between pyramid schemes and multilevel marketing programs (MLMs). While both work on the principle of getting new recruits to join the company and invest money, a legitimate MLM truly has products to sell, while a pyramid scheme is established primarily to make money for the people at the top of the pyramid. Where the focus is on recruiting new members rather than selling products, a pyramid scheme is more likely. The scheme makes money and will continue making money for the top-most person(s) in the pyramid until people at the bottom wise up or the top-most person runs out of funds to continue paying new recruits just enough to keep them on the hook—or law enforcement steps in after investigation and shuts the illegal business down.

Are you being investigated for allegedly participating in a pyramid scheme, or have you been charged with operating such a scheme? While the U.S. government does not have a federal statute that specifically targets pyramid schemes, the Federal Trade Commission has at times prosecuted participants in these schemes under statutes that address deceptive trade practices, or fraud. Persons convicted of fraud face years in prison and thousands of dollars in fines. If you’re facing pyramid scheme charges, you need to engage the services of Lexington pyramid scheme defense lawyer Dan Carman for defense against your charges.

How Does a Pyramid Scheme Work?

Nearly all pyramid schemes start out the same way. One person (the recruiter) dreams up a bogus business idea—one that promises a huge and nearly immediate investment return—and convinces other people to join the business, after each pays a fee. The recruiter then has his recruits recruit others, they all pay, and the money flows up through the layers of the pyramid to the top recruiter. Because each recruit does get some money as new recruits join, the top recruiter is able to keep them convinced they’re about to make big money, and that all they need to do is keep the new recruits coming in.

Recruiters have to be very convincing to talk new recruits out of their money. They may rent office space, hold showy recruiting meetings, and actually display products (usually worthless or overpriced) that the recruits are supposed to sell. The recruits may be required to pay for high-priced “training,” with the money going up the pyramid layers. Once the recruits have invested in the scheme, they find the pressure is on to recruit others rather than sell product. In a classic pyramid scheme, only a reasonably small fraction of recruits actually make any money.

Are Pyramid Schemes the Same as Ponzi Schemes?

Pyramid and Ponzi schemes are alike in several ways:

  • both promise unrealistic returns on investments
  • both may encourage investors or recruits to reinvest their profits
  • both rely on new investors or recruits to meet financial obligations to earlier investors or recruits
  • both are essentially insolvent (if a sudden demand were made to repay all investors or recruits)
  • both are illegal.

However, while pyramid and Ponzi schemes are alike in several ways, the main difference between the two is that a Ponzi scheme has only one “promoter.” This promoter is able to convince potential investors that their investments will generate huge financial returns because the promoter has found a guaranteed way to make money and make it fast.

The promoter doesn’t try to convince investors to recruit other investors, but often word spreads and early investors pull in family members and friends who have also become convinced they will make money fast and easily. By paying out “dividends” or paying off any investors who may want out, the promoter keeps investors on the hook. Then, when a Ponzi scheme is uncovered, the innocent investors find themselves out most if not all of the money they so trustingly invested.

How Are Pyramid Operators Prosecuted?

Investigations of possible pyramid schemes may be conducted by several arms of government, both state and federal:

  • The Securities and Exchange Commission (SEC)
  • the Federal Trade Commission (FTC)
  • Federal Bureau of Investigation (FBI)
  • U.S. Postal Inspection Service
  • Federal Attorney’s Office
  • State Attorney’s Office.

The FTC can bring cases against pyramid schemes under the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” The US Department of Justice may work with the FBI or other investigative agencies to bring criminal charges of mail fraud, securities fraud, tax fraud, wire fraud, tax evasion, money laundering, and/or conspiracy against alleged pyramid scheme operators.

A person convicted of any crime of fraud, tax evasion, or conspiracy faces prison time of five to up to 20 or more years and thousands of dollars in fines, and may also be required to make restitution to the victims of the crime.

What to Do If You Are Accused of Operating a Pyramid Scheme

If you are being investigated for operating or participating in a pyramid scheme, or have been charged with the crime, you need to understand you are being charged with fraud, which is considered a felony in both state and federal law. If you are convicted of fraud, you may face jail time, exorbitant fines, and you may be ordered to repay the victims of the scheme.

If you have been charged with a crime connected to operation of a pyramid scheme, you need the services of Dan Carman, a Kentucky pyramid scheme lawyer who will work diligently to defend your case. Dan is a criminal defense attorney in Lexington with experience in all areas of criminal law. He has been admitted to practice in all Kentucky state courts, the federal courts in both the Eastern and Western Districts of Kentucky, and in the U.S. Sixth Circuit Court of Appeals. Contact him at (859) 685-1055 or by filling out his online form.