THE HISTORY OF EASY MONEY SCHEMES

Pyramid schemes are a global phenomenon, the US is where the original Ponzi scheme occurred and the term was coined. When Charles Ponzi organized the securities Exchange company in Boston in 1919 and issued promissory notes payable in 90 days with 50 % interest, he kicked off a storm of investment frenzy which duped just about everyone, including politicians, law enforcement officers and reporters. He tricked speculators by using the money of new investors to pay old investors huge “profits”.

Ponzi took in over $ 15 million from this and other schemes before his house of cards collapsed, causing losses for thousands. There were similar schemes prior to Ponzi (for example, John Law’s “Mississippi Bubble” scheme in France in 1719 and William Franklin Miller’s Franklin Syndicate in 1899-a.k.a “520 % Miller”), but the Ponzi name stuck for this type of phenomena.

Later came chain letters, beginning with the “send-a-dime” letter widely appearing in Denver in 1935, which bore the heading “Property Club” and the slogan “In God We Trust” this led to the $1 chain letter in Omaha, chain letter agencies or “factories and the “Circle of Gold” which spread from California throughout the country in the late 1970’s-all of which used the postal system. Many of these chain letters went underground because of aggressive enforcement of federal mail fraud statutes. Still other variations such as chart and airplane games emerged later.

“Chain selling” or “Chain distribution” systems, the basis of multi-level marketing, was an eventual offshoot from chain letters. With chain selling, the selling of products was made through multiple levels of distributors, each of whom received some type of compensation for the sales of those recruited at lower levels, or one’s “downline”.

In 1967 Glenn W.Turner began an incredible distribution scheme in Orlando, Florida. His line purported to be cosmetics, featuring mink oil as a special ingredient, but in reality he sold distributorships. A participant paid a fee and became a distributor, entitling him to sell the cosmetic products, but more important, entitling him to sell other distributorships. Little selling of the cosmetics made in the sale of distributorships. Those transactions were essentially the same as in the chain letter, or the airplane or chart games, in that the new participant paid one fee to the party who brought him in another to the party at the top, and then assumed a position at the bottom of the pyramid.

Over five years, Turner “parlayed $ 10,000 … into a conglomerate that generated a cash flow of $200 million, and in which as many as 100,000 people may have invested…. Two main business organizations were developed to carry out his activities: Koscot (‘Kosmetics company of Tomorrow’) Interplanetary, Inc., the sales arm, and Dare to be Great, Inc., the training body”.

The Federal Trade Council of USA has described the essential features of an illegal pyramid scheme as follows:

Such schemes are characterized b the payment by participants of money to the company in return for which they received (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users… As is apparent the presence of this second element recruitment with rewards unrelated to product sales, is noting more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed.

It appears that pyramid schemes are considered illegal when legitimate products are subordinated to the emphasis on sales rights and overrides from recruiting a network of participants, quite unrelated to sales of products themselves. Such programs lead to inflated and unrealistic promises and inevitable market saturation. So pyramid schemes allow a few opportunists to take advantage of the ignorance and vulnerability of an unwitting populace-who fail to see that mathematically only a few can succeed at the expense of failure and losses of the masses recruited into any given program.

But there is a business model that is at least as pyramidal and powerful as any illegal pyramid scheme is multi-level marketing (MLM), more recently referred to as network marketing (NWM).

According to an FTC release on May 23, 1979, Amway-one of the earliest MLM companies-was ordered by the FTC “to stop fixing retail and wholesale prices and misrepresenting the profitability of Amway distributorships”. Since that time Amway Corporation (as a company) has been more careful about making inflated promises to prospects. However, on a far more important issue, Amway and-by extension-an emerging industry triumphed. The complaint that Amway’s sales plan was an illegal pyramid scheme was dismissed by the commission-a major coup for Amway and for all MLM companies that followed.

The Amway case has given credence to MLM and led to enormous growth in an industry that in the past decade has cost consumers tens of billions of dollars and left tens of millions of participants holding the bag of broken promises-and in many cases-broken lives. This spread to all over the world – The Globalization of MLM.

It is extremely difficult to define what is and what is not a pyramid scheme. MLM, for example, is continually reinventing itself in new versions and complex compensation systems-partly to get around legislation against pyramid schemes.

Consumers continue to be provided with misleading information (regarding what differentiates a pyramid scheme from an MLM) from government agencies and from the Better Business Bureau. Sources favorable to MLM, such as the Direct Selling Associations, MLM industry sources (such as Upline), and business and “opportunity” publications (such as Success magazine) then expand upon and perpetuate these misconceptions.