MLM and Ponzi Scams

The most common MLM scams are in fact Pyramid Schemes that exist in various forms. In the most crude form, the scheme does not offer any value other than the promises of wealth by simply asking others to contribute to the pool and hence creating a huge base.

Basically someone in the "upline" will approach you asking for a small sum of money to join the scheme. After doing so, all you need to do is the same, asking others to join by paying the money. The money gets to passed upwards, each upline making a little from it. If you have just joined the scheme, you will start off at the base and your risk is the highest.
pyramid schemes
Such a scheme that do not offer any value other than the pyramid system (i.e. passing money upwards) is not sustainable and is proven to fail, as in the case of the Ponzi system in the early 1990s.

Pyramid Systems may exist in different names, e.g. Matrix Schemes, Ponzi System, Chain Letters, etc. Although not the first of its kind, Charles Ponzi (picture below) was the one who made the scheme famous in the United States due to the large amount of money involved.

Charles Ponzi(courtesy of wikipedia)

What isn't important is what people may call them, because only the most stupid scammers would call their system a Pyramid, Ponzi, Matrix, HYIP or Chain Letter, or they would attract the attention of the authorities. Moreover, do not be enticed by the complicated "paperworks" involved. There are many ways to make the system look legal.

So far, we have known a few systems that offer value products and legal, e.g. Amway. (caveat emptor)

CNBC: Slideshow on Famous Celebrity Scams and Hoaxes

Some slideshow while taking a lunchbreak watching the sliding stock market. The slides include: 1) Bernard Madoff's Ponzi scheme 2) 3 celebrities scamed by 2 Wall Street brokerages in 1983 3) In 2009, a German trying to extort model Cindy Crawfo...

WatchMojo: How to Avoid a Bernie Madoff Scam

Watch this video by WatchMojo that discusses about Ponzi scam

I Got Scammed by an Online MLM Opportunity

It's not unusual if you are reading Internet forums or discussion boards where business opportunities are discussed, to find members posting quite often that they got scammed by an online MLM opportunity. If you combine it with the bad reputation that the network marketing industry already has it is a wonder why still people are joining multilevel marketing businesses.

But are all online MLM companies scams? And is the best solution to try to avoid getting into one of them no matter what?

MLM and the Current Financial Problems

If you are watching tv, listen to the radio, or read newspapers, there is a lot of talk and coverage from the media about the current financial problems that the American economy is facing and threatens to drag the whole world into a global recession. But will they be any consequences from all of this to the MLM industry? Are we going to face a crisis as marketers in that sector of the economy?

Matrix Scams on eBay

A search for "iPod" on eBay yields a couple thousand listings for the digital music player and accessories, but beware: Hundreds of the listings are inducements to join pyramid-style scams.

Ebay is swamped with new "matrix" schemes, which appear to be legitimate buyers clubs but are in fact variations on classic pyramid scams, which are outlawed around the world.

In most cases, eBay shoppers are offered hot products like an iPod, a game console or a cell phone at an incredible discount, say for $40 or $25.

The eager bargain hunter is told not to bid on the item, but is directed instead to sites like My3Mobile, The Phone Matrix or Goraks.com, which offer iPods or cell phones as free gifts when products like CDs or eBooks are purchased.

The catch is that buyers only get their free iPod after more people sign up. When making a purchase, the buyer's name is added to a list. As new members join, names are shuffled up the list. When they reach the top, the iPod is dispatched

To speed up the process, buyers are often encouraged to recruit new members to join the scheme. And that's where all the eBay posts come from: Victims are using eBay to recruit new members.

Of Ponzi and Pyramid Systems

There are many definitions on the internet regarding the various "get rich  quick" networking schemes. It can be confusing, and so it is worth the effort to define them clearly so that we know what is legal and what is not.

If you would like to know the difference between Ponzi and Pyramid, check out Wikipedia here. Basically, a Ponzi system is where a single person recruits all his investors (one-to-many). The Ponzi system promises high returns on investment, USING money from subsequent investors. For example, John promises Person A a 50% returns on his investment in 10 days. This will attract a lot of investors every day due to the high rate of returns. Within the next 10 days, Person B, C, and D also sign-up, so John will simply use B, C and D's money to return the 50% interest to Person A. Person A will not know where the money comes from as long as he gets the 50% extra back in 10 days as promised. As promised? Doesn't that mean he should invest even more money the next round. There you go, John will be a millionaire in a very short time. You can read an unverified story about Charles Ponzi here, the originator of the scheme back in 1920.

A point to note is that such a scam is still used occasionally today, in the form of "hit-and-run". There was a real case recently, where the scammer used "high rate of investment returns" to lure in their baits. The scammers will first return the interest within an agreed time frame to the investor as promised, so as to gain their trust, get them to invest even more money, or tell their friends about it. It is contagious - who doesn't want to ride on a "get rich scheme" that seemed to work after all the years of hopeless lottery attempts? Once the scammer has collected sufficient money to call it quit, he will then disappear with the money. This is why we don't see any scammers reaching to as many people as the earlier scammers did like Charles himself. The "hit-and-run" method is used so as to avoid getting noticed by the authorities - it will be too late if the police found out and knock on their door. All they need is a small group of believers (or ignorants), make enough cash, and run before the whole party gets "too big and glaring".

For the high-risk investors - we do not suggest trying to make the first money (i.e. the bait) and get out for good to avoid the "run". You will never know which part of the game the scammers are at when you hand over the money.

Pyramid systems are generally people recruiting people (with downlines forming a pyramid), often without selling any real products or real investment plan in the backend. There are different variants, such as downline paying the upline, upline earning commissions, or a forced matrix system with either characteristics. In a forced matrix system, it enforces the number of downline a participant can have. For example, a 7x7 matrix means that every person in the system can only have 7 direct downlines, while the 8th onwards will move under one of the existing direct downlines by random. In this way, a forced matrix can build a deeper pyramid as compared to traditional systems.

Generally a Pyramid System is is different from MLM which sells value products, such as Amway and Sunrider, etc.

We think that it can be confusing and errorneous to use the terms (Pyramid, MLM, etc) to decide if the next one you are joining is a legal system. Whatever the marketer call it, it would be most important to understand how a particular system works rather than the term used, to determine if it is legal or not. It may be advisable to check with the local authorities for more information before diving in.