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,” 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