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Guest post by: Dr Don Yates Sr PhD Become an Author

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Let's look at how a pyramid scheme operates from three points of view: the potential investor, the promoter or con artist, and the victim. Many pyramid schemes will present a payout formula or matrix much like this one:

# Payment of $500 Level 1 $150 x 3 = $450 # # # Level 2 $30 x 9 = $270 # # # # # # # # # Level 3 $30 x 27 = $810 # # # # # # # # # # # # # # # # # # # # # # # # # # # Level 4 $30 x 81 = $2430 etc. # # # # # # # # # # # # # # # # # # # # # # # # # # #etc. --------$3960

This example illustrates what is known as a three by four matrix. Each investor pays $500 to the promoter and is told to build a "downline" by recruiting three new members, who then each should recruit three more members. The investor is told that he will be paid $150 for each of the three members whom he enlists at the first level. The investor is also promised $30 commissions for each recruit at the next three levels. Thus, the investor should receive commissions for four levels of recruits below him, each of whom must recruit three more members, hence the name -- a three by four matrix.

To the potential investor/recruit this may look like a very appealing opportunity. The pyramid promoter is likely to persuade the investor that he is "getting in early" and that he should consider himself at the top of the matrix. From this perspective, it appears that he can earn $3,960 on an investment of $500, a whopping 792 percent return.

Now consider the pyramid from the investor/victim's perspective -- after the entire scheme has collapsed around him. The victim, like the first investor, thought of himself at the top of the pyramid but suddenly realizes that he is actually at the bottom, unable to find people interested in the program to build out his downline. He is not alone because mathematics shows that MOST investors will find themselves at the bottom of the pyramid when it collapses. The very structure of this matrix dictates that whenever the collapse occurs, at least 70 percent will be in the bottom level with no means to make a profit.

A Ponzi scheme could yield even worse results for investors, because it does not pay out any commissions at all. This can have disastrous consequences, as exemplified by Charles Ponzi's infamous fraud in the 1920's. Charles Ponzi, an engaging ex-convict, promised the Italian-American community of South Boston that he would give them a 50 percent return on their money in just 45 to 90 days.

Mr. Ponzi claimed that he could pay such a high rate of return because he could earn 400 percent by trading and redeeming postal reply coupons.

These coupons had been established under the Universal Postal Convention to enable a person in one country to pre-pay the return postage on a package or letter sent back from another country. For a short time after World War I, fluctuations in currency exchange rates did create a disparity between the cost and redemption value of postal reply coupons among various countries.

However, Mr. Ponzi discovered that he could only make a few cents per coupon and that handling large volumes of coupons cost more than they were worth. He stopped redeeming any coupons but continued to collect investors' money. When he actually paid a 50 percent return to some early investors, his reputation soared and more money flowed in from around the country. Mr. Ponzi bought a stylish house in the best part of town and purchased a large minority interest in his local bank, the Hanover Trust Company.

Eventually his scheme began to unravel, bringing ruin to the bank and thousands of investors. When Mr. Ponzi began to overdraw his accounts at Hanover Trust, the Massachusetts Banking Commissioner ordered Hanover Trust to stop honoring Ponzi's checks. The bank refused and even issued back-dated certificates of deposit to cover Mr. Ponzi's overdrafts. A few days later, the Banking Commission took over Hanover Trust, and Mr. Ponzi was arrested for mail fraud. In the end, Charles Ponzi owed investors over $6 million, an enormous sum of money for that time. He was convicted of fraud in both state and federal court and served ten years in prison.

In re Amway Corp., another landmark decision from the 1970's, the FTC distinguished an illegal pyramid from a legitimate multilevel marketing program. At the time, Amway manufactured and sold cleaning supplies and other household products. Under the Amway Plan, each distributor purchased household products at wholesale from the person who recruited or "sponsored" her. The top distributors purchased from Amway itself. A distributor earned money from retail sales by pocketing the difference between the wholesale price at which she purchased the product, and the retail price at which she sold it. She also received a monthly bonus based on the total amount of Amway products that she purchased for resale to both consumers and to her sponsored distributors.

Since distributors were compensated both for selling products to consumers and to newly-recruited distributors, there was some question as to whether this was a legitimate multilevel marketing program or an illegal pyramid scheme. The Commission held that, although Amway had made false and misleading earnings claims when recruiting new distributors, the company's sales plan was not an illegal pyramid scheme.

Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front "head hunting" or large investment fee from new recruits, nor did it promote "inventory loading" by requiring distributors to buy large volumes of nonreturnable inventory. Instead, Amway only required distributors to buy a relatively inexpensive sales kit.

Moreover, Amway had three different policies to encourage distributors to actually sell the company's soaps, cleaners, and household products to real end users.

First, Amway required distributors to buy back any unused and marketable products from their recruits upon request. Second, Amway required each distributor to sell at wholesale or retail at least 70 percent of its purchased inventory each month -- a policy known as the 70% rule. Finally, Amway required each sponsoring distributor to make at least one retail sale to each of 10 different customers each month, known as the 10-customer rule.

The Commission found that these three policies prevented distributors from buying or forcing others to buy unneeded inventory just to earn bonuses. Thus, Amway did not fit the Koscot definition: Amway participants were not purchasing the right to earn profits unrelated to the sale of products to consumers "by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products.

The 1990's first brought an important refinement in the law. As the Commission pursued new pyramid cases, many defendants proclaimed their innocence, stating that they had adopted the same safeguards -- the inventory buy-back policy, the 70% rule, and the 10 customer rule -- that were found acceptable in Amway.

However, an appellate court decision called Webster v. Omnitrition Int'l, Inc., pointed out that the Amway safeguards do not immunize every marketing program. The court noted that the "70% rule" and "10 customer rule" are meaningless if commissions are paid based on a distributor's wholesale sales (which are only sales to new recruits), and not based on actual retail sales. The court also noted that an inventory buy-back policy is an effective safeguard only if it is actually enforced.

While new cases were refining the law in the 1990's, radical changes were underway in the marketplace. Pyramid schemes came back with a vengeance. Like most economic activity, fraud occurs in cycles, and new pyramid schemes exploited a new generation of consumers and entrepreneurs that had not witnessed the pyramid problems of the 1970's.

Also, the globalization of the economy provided a new outlet for pyramiding. Pyramids schemes found fertile ground in newly emerging market economies where this type of fraud had previously been scarce or unknown.

In Albania, for example, investors poured an estimated $1 billion into various pyramid schemes -- a staggering 43% of the country's GDP.

In the U.S., probably nothing has contributed to the growth of pyramid schemes as much as Internet marketing. The introduction of electronic commerce has allowed con artists to quickly and cost-effectively target victims around the globe. After buying a computer and a modem, scam artists can establish and maintain a site on the World Wide Web for $30 a month or less, and solicit anyone in the world with Internet access. Pyramid operators can target specific audiences by posting messages in specialized news groups (e.g., "alt.business.home" or "alt.make.money.fast"). In addition, through unsolicited e-mail messages -- known on the Internet as "spam" -- pyramid operators can engage in cheap one-on-one marketing.

Whereas it might cost hundreds or thousands of dollars to rent a mailing list and send 10-cent post cards to potential recruits, it costs only a fraction of that to send out similar e-mail solicitations. On the Internet, you can acquire one million e-mail addresses for as little as $11 and spend nothing on postage.

The Federal Trade Commission's current law enforcement efforts reflect this new wave in pyramiding. The Commission has brought eight cases against pyramid schemes in the last two years, and six of those have involved Internet marketing. One recent case, FTC v. FutureNet, Inc., is particularly instructive because it starkly reflects the potential for abuse in hi-tech and newly deregulated industries. FutureNet allegedly claimed that, for payment of $195 to $794, investors could earn between $5000 and $125,000 per month as distributors of Internet access devices like WebTV.

The FTC filed suit, charging that FutureNet's earnings claims were false because the company really operated an illegal pyramid scheme. Near the time of filing, FTC investigators discovered that FutureNet had begun to sell electricity investments as well, riding a wave of speculation in advance of the deregulation of California's electricity market. The Commission obtained a TRO and an asset freeze over the defendants' assets and eventually reached a $1 million settlement with the corporate defendants and two individual officers.

The settlement requires the defendants to pay $1 million in consumer redress, bars them from further pyramiding activity of any kind, requires them to post a bond before engaging in any network marketing, and requires them to register with state utility officials before engaging in the sale of electricity. The Commission continues to litigate its case against three non-settling individual defendants.

Law enforcement is the cornerstone of the Commission's fight against pyramid schemes; however, we also try to educate the public so that they can protect themselves. In our educational efforts, we have tried to take a page from the con artists' book and use new online technology to reach consumers and new entrepreneurs. For example, on the agency's web site at "www.ftc.gov", the Commission has posted several alerts regarding pyramid schemes and multilevel marketing problems. The Commission records over 2 million "hits" on its home page every month and receives several thousand visitors on its pyramid and multilevel marketing pages.

The staff of the Commission also has posted several "teaser" web sites, effectively extending a hand to consumers at their most vulnerable point -- when they are surfing areas of the Internet likely to be rife with fraud and deception. The "Looking for Success" site is one example. It advertises a fake pyramid scheme. The home page of "Looking for Success" promises easy money and talks in glowing terms about achieving "financial freedom." On the second page, the consumer finds a payout plan common to pyramid schemes, as well as typical buzz words like "forced matrix," "get in early," and "downline." Clicking through to the third and final page in the series, however, brings the consumer to a sobering warning: "If you responded to an ad like this one, you could get scammed." The warning page provides a hyper-text link back to FTC.GOV, where consumers can learn more about how to avoid pyramid schemes.

Unfortunately, pyramid schemes are likely to continue to proliferate both here and abroad in the near future. However, we can all help stem the tide by working together. Finally, you can encourage the relevant officials in your countries to combat pyramid schemes by educating consumers and businesses about how to recognize and avoid this type of fraud. This can be particularly important in emerging markets, where experience with investment opportunities may be scarce.

Beware of any plan that makes exaggerated earning claims especially when there seems to be no real underlying product sales or investment profits. The plan could be a Ponzi scheme where money from later recruits pays off earlier ones. Eventually this program will collapse, causing substantial injury to most participants.

Particularly when there is, no product involved or when there is a separate, up-front membership fee. At the same time, do not assume that the presence of a purported product or service removes all danger. The Commission has seen pyramids operating behind the apparent offer of investment opportunities, charity benefits, offshore credit cards, jewelry, women's underwear, cosmetics, cleaning supplies, and even electricity.

Check to see whether its price is inflated, whether new members must buy costly inventory, or whether members make most "sales" to other members rather than the public. If any of these conditions exist, the purported "sale" of the product or service may just mask a pyramid scheme that promotes an endless chain of recruiting and inventory loading.

Overseas connection or special relationship that is difficult to verify. Charles Ponzi claimed that he had a secret method of trading and redeeming millions of postal reply coupons. The real secret was that he stopped redeeming them. Likewise, CDI allegedly represented that it had the backing of a special overseas bank when no such relationship existed.

Many pyramid schemes advertise that they are in the "pre-launch" stage, yet they never can and never do launch. By definition, pyramid schemes can never fulfill their obligations to a majority of their participants. To survive, pyramids need to keep and attract as many members as possible.

Thus, promoters try to appeal to a sense of community or solidarity, while chastising outsiders or skeptics. Often the government is the target of the pyramid's collective wrath, particularly when the scheme is about to be dismantled. Commission attorneys now know to expect picketers and a packed courtroom when they file suit to halt a pyramid scheme. Half of the pyramid's recruits may see themselves as victims of a scam that we took too long to stop; the other half may view themselves as victims of government meddling that ruined their chance to make millions. Government officials in Albania have also experienced this reaction in the recent past.

Every investor fantasizes about becoming wealthy overnight, but in fact, most hi-tech ventures are risky and yield substantial profits only after years of hard work. Similarly, deregulated markets can offer substantial benefits to investors and consumers, but deregulation seldom means that "everything goes," that no rules apply, and that pyramid or Ponzi schemes are suddenly legitimate.

As we continue to pursue pyramid schemes, we would be delighted to coordinate our efforts with law enforcement in your countries. It is only too evident that the expansion of fraud across borders and on the World Wide Web means that no one agency or country can work effectively on its own. We must be collectively vigilant in order to protect the integrity of our marketplaces and the pocketbooks of our consumers. SpeechFTC-IMF

We have already reviewed multilevel marketing, affiliate tier programs and pyramid schemes and have discussed the similarities and differences with particular emphasis on how to detect a pyramid scheme. It should be obvious; the benefit of multilevel marketing could be also known as multilevel earnings. A single avenue of earning is you selling your product or service results in a one-time sale. There are no residual benefits to you unless you have a store such as ClickBank will you possible earn an additional sale of the same customer. Adding a multiple tier opportunity enables you to gain earning from your downline, perhaps one level or more – giving you greater and perhaps residual earnings from your one time sale.

In another Pay per Click or Pay to Read Section, you will see that those sites that actually pay you, pay your very little and the only way to make any real income, is to get paid from your work and the work of others – your downline.

The likelihood of a top guru joining your affiliate or MLM site is nil, because they can make their own sites faster that you can join them. So you either take your time and slowly build your downline, or you create your own site with enough content and value, that perhaps your will attract a Joint Venture partner, or o a top performance joins under you and brings his or her downline with them. For one opinion on the differences, see the following video

An interesting MLM versus Affiliate Video. (Subtle selling vs. recruiting and selling) Also discusses Cash Gifting Programs and Pyramids Scheme - Legal issues. Do your homework. Limited money made from 2 tiers, 98% do not make money. Worth seeing! Search for 2 create a website and you will find a very aggressive and successful lady. See the difference ways she advertises from blogs to videos. MLM and Affiliates Marketing

This site wants your direct view so we cannot publish the article, but we can link to the article. Link only site. AffiliatesSeeking.com is a good source of information on this subject and others.

These are a great view and a must see for the “I Don’t Do MLM” readers:

NETWORK MARKETING EXPLAINED - BY TIM SALES

MLM: DO MOST PEOPLE FAIL? – TIM SALES

IS MLM A PYRAMID SCHEME - TIM SALES

FIRST CLASS MLM TOOLS

Is it a MLM or a Networking company? Follow the 12 steps.

Get into the "BRAIN & PUSHBUTTON" MLM Detective mindset! Look at the supposed MLM Company’s website. First suspect clue would be no street or city address, worse yet, only an email address, no phone number. Then look for the pictures and names of the owners of the company. Not having these on a website is a quick absolute reason NOT to join. Some wise, seasoned MLM distributors doing their Due Diligence Investigation will use “http://earth.google.com/” to (free 7 day trial or $20) look at a satellite picture of the size and location of a supposed MLM Company office. Address = trailer house or home? That is a 911 = Run!

Use your MLM Detective Investigative "BRAIN." Only use a credit card that will accept charge backs. Returns? Honest companies allow refunds within 60-90 days (8 states require a year)!

Money by FedEx - UPS only? Yikes! Scam Time! A trained MLM Detective will tell you the scam artists do this to avoid Postal Fraud charges! A PUB (private mailbox) address is an indicator of dodging Postal Fraud Investigators = 911 run a SCAM!

Next MLM Detectives will go to the Internet and enter the following into one or two of the major search engines:

• The MLM Company's name (owners too) and the word "scam". Go through two pages! Look forforum message comments for legitimate complaints (see D below).
• Then do the same for "complaints, lawsuits, and news articles archived on search engines.
• Also check who registered the website domain of any new company claiming: amazing, incredible, proprietary, never seen before in the universe, revolutionary, products, services or technologies! Check http://www.whois.net/ for the domain lookup. Companies with good offerings would register a name 6 months to a year ahead of time.
• A warning on MLM due diligence for MLM Researchers! There are sad sites and forums that are unfairly negative toward all MLM - Network Marketing companies. Ignore these "Anti -MLM Zealots" and only look for appropriate information. A good MLM Detective will ignore 99% of their B S.!

Alexa can give you Internet Web Ranking Due Diligence that on 1 out of 10,000 knows about. Grab scammers by the throat when they come to pester you!

http://www.mlmwatchdog.com/mlm_due_dilligence_secret_alexa.html

There are over 22 states that require registration if an opportunity (not just MLM but includes MLM) requires you to spend over $500. Two states say it must be kept under $200. If a company says join for free and spent $501 for product - They had better be registered!

A good MLM Detective will run if there is no way to join for under $500 See the new FTC warning (below) this MLM Detective due diligence article and my notes on the $500! SCAM example -Thinking it was MLM Here is a list by the FTC of States requiring "Biz Opp" registrations. Remember this if a recruiter is hustling you for $over $500 and no registrations.

Why join? They may get shutdown for not having thestate Business Opportunityregistrations! Why risk joining? You can lose time and money! There goes your opportunity! http://www.ftc.gov/bcp/franchise/netbusop.shtm

Raise the dead? Live 130 years? Cure Cancer (which is an illegal claim for any nutritional)! If it is not a nutritional, skip down to next due diligence for MLM Detectives.

• Get a list of the MOST critical ingredients in the MLM’s nutritional product and put them beside your computer.
• Go to the U.S. Government National Institutes of Health nutritional research website PUB MED. Go to Pub Med after you read the next two sentences!
• http://www.ncbi.nlm.nih.gov/sites/entrez
• Look up the major ingredient(s) by entering its name in the search box.
• Read through the scientific studies. Some may be complex, but the END sentence usually gives you a good idea if the study was a Plus or Minus for the product. Read over at least 10 articles use a piece of paper to keep track of studies like this Study #1 Good Study #2 good #3 What did they say? (Or just what?) Study #4 GoodStudy #5 Bad. Make your own judgment!

MLM Detective "PUSHBUTTON" Go to the Better Business Bureau website for the city where the MLM-Network Marketing Company is located. Most are free.

You are looking for the number of complaints the BBB has NOT resolved. If there are over 2-4, hold off joining, it very well could mean problems. MLM Detectives don't overly trust BBB reports but we the can be goodindicators. Here is the National BBB Advanced Search -don’t use the quick search. http://search.bbb.org/SearchForm.aspx?mode=Business

An email solicits you to a "HOT" MLM, Party Plan or Network Marketing Company!

• Look for exclamation marks and capital letters used to lend legitimacy or urgency! Beware of disclaimers such as “this is not a pyramid selling scheme or scam” (legitimate offers don't contain such claims). Don't believe promises of fast wealth.

• If you feel, see or hear "Get Rich Quick!” Run! If it sounds too good to be true, it usually is! MLM - Network Marketing takes some work, like any good Home Based Business.

Don’t let the money over-excite you! Use the products or services being sold first! If they excite you, then look at the money. You should try sharing and selling the products/services to test them out. Spending some money to test a company and their offerings is a wise thing to do.

Check with the Attorney General in the state where the company is located. Be very brief with your email or phone call and stick with asking, “MLM Company XXX is located in city in your state, do you have complaints against Company XXX?” A complete list of Attorney Generals is inMLM WatchDog Complaints Library.

MLM Detective "BRAIN." These are the Enrollment Agreement or Terms of Agreement plus Policies and Procedures. These all together are a business contracts, enforceable in a court of law. The Distributor Rights Association says they shouldn't be over 15 pages long. Don't sign if you don't feel comfortable about the contract.

Then find an expert to analyze it. If it only pays for signing up new people and not sales of products/services - run! There's a copy of my MLM Compensation Pay Plans Book on Amazon. Search for my name by author - Rod Cook. No, this is not a shameless promotion for my book. My book is the only one with big pictures, diagrams and detailed to help both the new person and expert. MLM Watchdog ethics let me say it's a good book! Plus my book has a whole chapter on avoiding Pyramid Schemes. MLM Detective

In this section, we have covered the gamut of Affiliate, Pyramid and MLM programs. We have provide some great links regarding Network Marketing and MLM Myths

No small challenge, when you are trying to find a program that suits you.

Tips and guidelines were given to help you avoid the pyramids and scams.

As to which program is best for you, try to find something that you are passionate about, something of interest or something that ties back your hobby. If it is just about making money; do your due diligence and check out the company before you put your money down

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