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Springfield Business Journal Articles
Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.


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Pyramid schemes have taken a new twist recently, and women are the victims.

What is a pyramid scheme? A pyramid scheme is a fraudulent and illegal organization that focuses on recruiting victims. Pyramid schemes can take many forms, including chain letters, investment clubs, gifting clubs, and mail order sales. Victims are promised huge "returns" on their "investment" if they recruit others to join the pyramid.

A pyramid scheme is similar to a multilevel marketing operation, except that there is no legitimate product. Mary Kay Cosmetics and Amway are classic multilevel marketing companies. The key to making money is to recruit other salespeople and receive commissions from their sales. As described on Amway's web site, "Your 'group' is the team of distributors you've sponsored. Many you've sponsored personally, but others were sponsored by those you personally sponsored. You train and motivate your group and, as a result, you earn extra income when they earn income. As you continue to grow your business and they continue to grow theirs, you both can benefit. . . Over time, a distributorship can grow considerably. The more distributors in your group who become successful in the Amway business, the stronger your business will become."

Pyramid schemes, although employing the same organization as multilevel marketing companies, do so without the sale of legitimate products. Any "opportunity" that offers commissions for recruiting new members rather than for selling something of value may well be an illegal pyramid.

The Illinois Attorney General's web site explains why pyramids must fail. "For a pyramid scheme to profit, there would have to be an endless supply of willing participants. However, the supply of participants is limited, and each new level of participants has less chance of recruiting others and a greater chance of losing money. In fact, pyramids inevitably collapse because it is mathematically impossible to recruit the number of people required to support the pyramid. A nine-level pyramid, which is built when each participant gets six 'friends' to join, would involve over ten million people!"

Pyramid schemes have been around for years and resurface periodically. In July of 2000, the "Family Ties Gifting Club" surfaced in central Illinois, and many people lost money. David Russell Myrland of Kirkland, Washington was sued by the Illinois Attorney General after he conducted several seminars on the legality of gifting clubs. Several other Springfield residents were also charged in the scam.

Mr. Myrland maintained that since the members of the club were "gifting" and not "investing," there was no scam. In addition, as with most pyramid schemes, victims were told that they might not earn the projected returns. Nevertheless, the Family Ties Gifting Club was a fraud. It does not matter what label the organizers give to participants' contributions. Even though participants were told they might not profit, the focus of the seminars was the opportunity to make money. People contributed with the hope of receiving money quickly and easily.

Now scam artists have developed a new tack. They appeal to women on a personal level. They form "clubs" for women only that resemble support groups. The sales pitch is "women helping women." Victims are encouraged to solicit contributions from their friends and family members.

NBC Nightly News recently exposed a pyramid scheme directed at women in Maine. One victim was Cathy Oleson who lost $5,000. "This was a club where you didn’t get strangers," says Oleson. "You got a friend." Oleson was told that she could earn $40,000, but to do so, she would have to recruit new members. She never received any money and lost her entire contribution.

This type of fraud has spread across the country. New Mexico Attorney General Patricia Madrid says, "The pyramids that have targeted women have become the number one scam in New Mexico. It's taken about a year and a half and it has spread like wildfire."

As reported by NBC Nightly News, "Officials say the pyramid scheme is especially cruel because it uses women's friends to lure them into believing their financial problems can be solved. 'That’s the most insidious part of the scam,' says Madrid. Since last year, at least 17 states have warned women to beware of invitations to meetings disguised as 'diner parties' or 'gifting clubs.' 'The program very cleverly plays on themes that you would see on an Oprah show of women supporting women,' says Robert Fitzpatrick, a consumer advocate. 'You know, it made you feel good,' says Oleson."

For more information on pyramid schemes, see www.ag.state.il.us and www.msnbc.com.
Posted in: February, 2002
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