Last week I discussed Ponzi schemes. This week I want to talk about a common variation, the pyramid scam. Many people fall for this type of con game and a lot of money is lost every year.
These scams are not multi-level marketing setups. They share the same attributes, but true multi-level marketing organizations are legitimate. They have real products or services to sell, buyers get value for their money and there is a network that stands behind agents and products.
Entities such as Tupperware, Avon and Amway have been in business a long time, are legitimate and above-board, and should not be confused with pyramid schemes.
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Under the Criminal Code of Canada and Canada’s Competition Act, pyramid schemes are illegal. If a person taking part in the scheme becomes entitled to receive more money than they invested in the scheme solely by reason of recruiting others, that’s illegal.
The problem is that money is made solely through the act of recruitment. There is either no underlying product or service, or the product or service has no actual value. The money simply flows up the ladder, with the people at the top making large profits for a limited time, and the people at the bottom losing their entire investment.
Ultimately, the scheme collapses under its own weight, leaving people near the bottom of the pyramid with a total loss on their investment. It is mathematically impossible for everyone to make money in a pyramid scheme, although that is what promoters promise. In fact, on average more than 80 percent of people investing in a pyramid scheme lose their money.
A notable business that was alleged to have been a pyramid scheme that exploded was called Treasure Traders International, which sold gemstones that were almost worthless at greatly inflated prices to “special members”.
Earlier this year, a Canadian scheme named Business in Motion was exposed on a national television show. These scamsters are generally on top of trends. One scheme, Women Helping Women, began in Canada and spread to several countries around the world, bilking many along the way.
Any time there is a high pressure approach, or the proposed venture indicates you will make money by recruiting other people to work under you, beware – it may be a pyramid scheme. Miraculous profit margins and products are often the basis of such ventures.
Other times, there is no product or service offered in exchange for the money paid. Sometimes there is a product but its value is grossly inflated. Often, this is a form of “membership” leading to illusory discounts.
Another hallmark of the pyramid scheme is secrecy. It is promoted through gossip and by one person to another. Meetings are secret, and closed to the public. There are often glowing testimonials from other people (“Bill G.”, “Sally R.”) who have supposedly made fortunes.
Any time you encounter a proposal with these attributes, call the police to see if the scheme is under investigation. There is almost never any easy money to be had. If someone promises profits of 500 percent and it sounds too good to be true, it is. Be careful, seek professional investment advice and don’t succumb to pressure.
Rick Danyliuk is a practising lawyer in Saskatoon with McDougall Gauley LLP. He also has experience in teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
