How to spot a pyramid scheme: beware of friends who hook you into selling get-rich-quick products

Black Enterprise, Feb, 1998 by Cheryl Coward

Beware of friends who hook you into selling get-rich-quick products

Every year, tens of thousands of Americans fall victim to one of the most widespread business scams--pyramid schemes. Leisa Jenkins, 30, then a paralegal in New York City, was invited to attend "a business opportunity meeting" in a Brooklyn, New York, cafe. Jenkins and 25 others were told that, with a $500 investment, they could become independent agents for a discount long-distance phone company and earn thousands of dollars a week. Their job was to sell the service and recruit a sales force to increase their returns. Jenkins, however, quickly saw the flawed reasoning behind the program.

"The only way to make money is to sign 1,000 or more people up under you consistently for one year, 11 says Jenkins, who is now a law student at the University of Iowa. "And you need big clients to make a profit." Participants fall into a never-ending cycle of solicitation. Most find few recruits, and subsequently lose money when the pyramid collapses. Agents realize this and begin "slamming"--switching consumers' long-distance service without their permission.

Victims of these kinds of rackets, usually seeking to start a home-based business, typically "invest" several hundreds to tens of thousands of dollars into a purportedly legal, high-return, multilevel marketing (MLM) business. Scam artists pass themselves off as legitimate MLM distributors. Their products, however, usually have no real market value.

Pyramid schemes increase in number and type every year, according to the Federal Trade Commission. Promoters often target victims vulnerable to their get-rich-quick mantras--the elderly, recent college graduates and new immigrants--who are then pressured to recruit friends, relatives and co-workers. To prevent yourself from becoming a statistic, consider the following guidelines:

* Don't believe the hype. Pyramid promoters quickly build excitement to a fever pitch by emphasizing quick returns and an easy road to riches. They thrive in frenzied, highly charged meetings and use the induced emotional high to mask the dire odds of success. Sophisticated promoters recruit on the Internet and use slick multimedia presentations tied to vague high-tech ideas or New Age health and environmental products. Recruitment meetings have stepped up to cyber cafes and upscale hotel conference facilities.

* Pay attention to the source of profits. "We advise people to look at how the money is made and make sure that there is in fact a real product and real sales," says Liz Doherty, communications director of the Direct Selling Association of America (DSA), a trade association for direct selling companies in Washington, D.C. "All the compensation should be tied back to sales instead of just entry fees, training programs and recruitment," she says.

Little explanation is made about the real consumer market for the products and whether or not the company will buy back unsold inventory, which some legitimate companies will do if you quit the business. Some states require buy-backs for at least 90% of the original cost, according to the DSA. Call the consumer fraud department of your local district attorney or state attorney general's office for information on buy-back regulations.

* Don't give money or financial information to anyone immediately. Take your time when making an investment into any business that appears to have easy entry. Appeals such as "get in on the ground level" and opportunity will be lost "if you don't pay now" are common ruses to distract you.

* Conduct your own background investigation. Contact numbers should be clearly labeled in the company literature. Call your local Better Business Bureau and the DSA (202-293-5760 or www.dsa.org) for information on legitimate companies. The DSA distributes free brochures on pyramid schemes and business opportunity frauds. For information on Internet-based pyramid schemes, contact the National Fraud Information Center (800-876-7060 or www.fraud.org). If you become aware of an illegal pyramid scheme, contact the FCC's Consumer Response Center at 800-554-5706 or online at www.ftc.gov.

RELATED ARTICLE: HOW A PYRAMID SCHEME WORKS

IF ONE PERSON RECRUITS SIX AGENTS, EACH OF-WHOM, IN TURN, RECRUITS SIX OTHERS, HERE'S HOW THE NUMBERS WOULD MULTIPLY IN THEORY. MOST PEOPLE, HOWEVER, FAIL TO RECRUIT NEW MEMBERS AND THE PYRAMID SOON COLLAPSES.

Level1    3
Level2    36
Level3    216
Level4    1,296
Level5    7,776
Level6    46,656
Level7    279,936
Level8    1,679,616
Level9    10,077,696
Level10   60,466,176
Level11   362,797,056