How to Expose Pyramid Schemes and Recover Compensation
Pyramid schemes are investment scams clothed as business opportunities that guarantee you income for an act. Usually, the primary promise is that you will receive fabulous returns if you recruit new participants that will also do the same.
The danger with this category of investment scams is they can look very similar to legitimate opportunities. The company may have a well-performing product that you also have to engage with. But eventually, the model will become unsustainable and the pyramid will crash.
Almost all the participants at the bottom of the pyramid will lose heavily and even higher-placed participants may suffer. Unfortunately, pyramid schemes are very popular and very costly. The only winners in these types of schemes, are the ones that started the scam.
There are a hundred and one legitimate ways that investing will cost you money. What you don’t need, is to lose your hard earned money through scams such as pyramid schemes. This is why Weltz Law has a very vibrant securities practice dedicated to helping aggrieved investors like you recover compensation.
What are Pyramid Schemes?
The SEC defines pyramid schemes as unsustainable “businesses” that have the following characteristics:
- They promise a high return over a short period of time
- May or may not promote a product or service
- Reward or profit is tied to recruiting new participants
The scheme usually begins with one or a few top-level members that recruit newer member who have to pay upfront costs up the chain. Those same new members will be required to go out and recruit other members who will also pay upfront costs.
A portion of these subsequent fees also be kicked up the chain. It goes on and on until what you have pretty much resembles a pyramid. For some of these schemes, there will be no product that participants can engage in. Even if it involves a product, these will usually be pointless or bogus. These schemes are often called naked pyramid schemes.
For others, there will be actual products or services that are selling very well. Participants will be required to buy some amount of these products themselves, and bring new recruits that will do the same. These are called product-based pyramid schemes.
The problem with these schemes is that the model is very sketchy and unsustainable. While early participants may make some money off the scheme, prospective member pools will eventually dry up. This means it will be difficult to create any new funds for the scheme and before long, the operation will shut down.
By the time everything shuts down, top level participants will walk away with loads of cash. The majority of members, who will be low-level, will leave both empty-handed, and with serious losses to boot.
The reason why these schemes are illegal is the recognition of the founders, right from the beginning, that many will lose. So, they are designed to scam the majority of participants, even if some may make profits.
Are They Different From Pyramid Schemes?
Yes, they are different. Although both schemes thrive on the introduction of new participants and the recognition that the scheme will eventually fail, there are material differences.
Ponzi schemes usually lead participants to believe that they are investing in a secure opportunity. They are assured of fixed returns over a period of time, all in exchange for their investment. Also, there is usually no fixed amount required for participation. Members can invest as much as they desire, with an assurance that they will receive a fixed percentage as returns.
The difference for pyramid schemes is that participation is hinged on recruiting new members. Although some registration fee will be required, this is usually fixed and has no guarantee of fixed returns, just that they will be fabulous.
How can You Recognize One?
It can be notoriously difficult to recognize pyramid schemes. This is largely due to the fact that they are often intentionally structured to look like legitimate multi-level marketing businesses..
In fact, many businesses that look legitimate have been implicated in allegations of pyramid schemes. And many lawsuits have been filed against high-profile businesses for operating pyramid schemes. So, it can be really difficult to tell if what you are involved in is a scam. Here are some things to look out for:
- No genuine product or service: The schemes to be especially careful about are those ones that have no demonstrably genuine product. If what is being sold is hard to value, it is more likely that it is a scam.
- Emphasis on recruiting: The primary focus in a pyramid scheme is on recruitment. Rewards, commissions and advancement are usually tied to the task of bringing new members. You should be careful if you are encouraged to bring more members in exchange for higher commission.
- Complex commission structure: If you cannot easily understand how commissions work, you may be involved in a scam. Legitimate businesses should clearly show how you can be entitled to a commission and how it relates to what you do.
- Promise of high returns in a short period: Any business that promises you high returns in a very short period is suspect. It may mean that money is simply taken from new recruits and paid to old members.
- No demonstrated sales revenue: This is one way you can differentiate between scams and legitimate MLM companies. The latter will ordinarily generate most of their revenue from selling products. If revenue is generated more from recruiting members or if you are not allowed to access the records, be cautious.
- Easy money or passive income: The truth of legitimate businesses is you only receive reward for value. If you cannot see a clear nexus between what you do and the fabulous returns you are promised, you should be careful.
Can You Recover Compensation?
Yes, in deserving circumstances, you may be able to recover whatever amounts you have expended on the scheme. Unfortunately, these schemes can make it very difficult for investors to recover their losses. So, the circumstances in which you can recover compensation may be severely limited.
In some cases, third parties such as banks may be successfully held liable either for supervising the scheme or offering assistance. In other cases, it may be possible to sue the originators of the scheme and force them to return the proceeds of the scam.
In all events, it is important to get in touch with an attorney as soon as you believe you have been a victim of a pyramid scheme.