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Encyclopedia > Pyramid scheme
The unsustainable geometric progression of a classic pyramid scheme
The unsustainable geometric progression of a classic pyramid scheme

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. It has been known to come under many guises. Some famous examples including the massive Albanian Pyramid Schemes of 1996[1] were technically not Pyramid schemes but Ponzi schemes. The Earth Day flag includes a NASA photo. ... The term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, including its purpose, offerings, strategies, infrastructure, organizational structures, trading practices and operational processes and policies. ... For other uses, see Money (disambiguation). ... This article is about a term used in economics. ... Year 1996 (MCMXCVI) was a leap year starting on Monday (link will display full 1996 Gregorian calendar). ... A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns (profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business, named after Charles Ponzi. ...


Pyramid schemes are illegal in many countries, including the United States,[2] the United Kingdom, France, Canada, Malaysia, Norway, Australia,[3] New Zealand,[4] Nepal,[citation needed] Sri Lanka,[citation needed] and Iran.[citation needed] These types of schemes have existed for at least a century. For other meanings, see pyramid (disambiguation). ...

Contents

Models

There are other commercial models using cross-selling such as multi-level marketing (MLM) or party planning which are legal and sustainable, although there is a significant grey area in many cases. Most pyramid schemes take advantage of confusion between genuine businesses and complicated but convincing moneymaking scams. Multi-level marketing (MLM, now sometimes called network marketing) is a business model that combines direct marketing with franchising. ... The party plan is a method of marketing products by hosting a social event, using the event to display and demonstrate the product or products to those gathered, and then to take orders for the products before the gathering ends. ... A confidence trick, confidence game, or con for short, (also known as a scam) is an attempt to intentionally mislead a person or persons (known as the mark) usually with the goal of financial or other gain. ...


The essential idea behind each scam is that the individual makes only one payment, but is promised to somehow receive exponential benefits from other people as a reward. A common example might be an offer that, for a fee, allows the victim to sell the same offer to other people, or receive bonuses through other people they refer. Each sale includes a fee to the original seller.


Clearly, the flaw is that there is no end benefit; the money simply travels up the chain, and only the originator (or at best a very few) wins in swindling his followers. Of course, the people in the worst situation are the ones at the bottom of the pyramid: those who subscribed to the plan, but were not able to recruit any followers themselves. To embellish the act, most such scams will have fake referrals, testimonials, and information.


Internet

In 2003, an internet-based "pyramid scam"[5] was uncovered by the United States Federal Trade Commission (FTC), where customers would pay a registration fee to join a program and purchase a package which included Internet mail and related goods and services. The FTC's complaint states that the company assured consumers who purchased the package would allow them to earn significant commissions for every website sold. | logo_caption = | seal = US-FederalTradeCommission-Seal. ...


The FTC alleged that the company deceptively represented that consumers who participated in their scheme would earn substantial income, when in fact most consumers lost money in the operation, and that the defendants provided deceptive marketing material to affiliates - providing them with the means to deceive others; and finally, the company failed to disclose that a substantial percentage of participants would lose money, and that the scheme was actually an illegal pyramid scheme.


Identifying features

The distinguishing feature of these schemes is the fact that the product being sold has little to no intrinsic value of its own or is sold at a price out of line with its fair market value. Examples include "products" such as brochures, cassette tapes or systems which merely explain to the purchaser how to enroll new members, or the purchasing of name and address lists of future prospects. The costs for these "products" can range up into the hundreds or thousands of dollars. A common Internet version involves the sale of documents entitled "How to make $1 million on the Internet" and the like. The result is that only a person enrolled in the scheme would buy it and the only way to make money is to recruit more and more people below that person also paying more than they should. This extra amount paid for the product is then used to fund the pyramid scheme. In effect, the scheme ends up paying for new recruits through their overpriced purchases rather than an initial "signup" fee. Market capitalization, often abbreviated to market cap, mkt. ...


The key identifiers of a pyramid scheme include the following:

  • A highly excited sales pitch.
  • A reassurance that it is not, in fact, a pyramid scheme, possibly with a false account of what a pyramid scheme is.
  • Little to no information offered about the company unless an investor purchases the products and becomes a participant.
  • Vaguely phrased promises of limitless income potential.
  • No product, or a product being sold at a price ridiculously in excess of its real market value, or a product with minimal or unrealistic market potential. As with the company, the product is vaguely described.
  • An income stream that chiefly depends on the commissions earned by enrolling new members or the purchase by members of products for their own use rather than sales to customers who are not participants in the scheme.
  • A tendency for only the early investors/joiners to make any real income.
  • Assurances that it is perfectly legal to participate.
  • The insistence they are not here to pressure you but merely to guide you.
  • The idea that there are no bosses, only coaches and mentors.

The key distinction between these schemes and legitimate MLM businesses is that in the latter cases a meaningful income can be earned solely from the sales of the associated product or service to customers who are not themselves enrolled in the scheme. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding".[6] However, the absence of payment for recruiting does not mean that an MLM is not a cover for a pyramid scheme. The distinguishing characteristic is whether the money in the scheme comes primarily from the participants themselves (pyramid scheme) or from sales of products or services to customers who are not participants in the scheme (legitimate MLM). Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... For other uses, see Commission. ... Multi-level marketing (MLM, now sometimes called network marketing) is a business model that combines direct marketing with franchising. ...


Market saturation

Over 96% of the people who get involved in pyramid schemes never recoup their initial investment.


The people on the bottom level of the pyramid, no matter how shallow or deep it goes, will always lose their money. It is easy to see that the number in the bottom level of the pyramid always exceeds the total of all those in the levels above no matter how many levels there are. If each level must recruit six more below them, the ratio of losers to winners is close to 5 to 1 - ~84% of all investors will lose their money. The pyramid in reality would not be perfectly balanced and some members might be able to partially fill their number of recruits, but the same principles apply.


"8-ball" model

Many pyramids are more sophisticated than the simple model. These recognize that recruiting a large number of others into a scheme can be difficult so a seemingly simpler model is used. In this model each person must recruit two others, but the ease of achieving this is offset because the depth required to recoup any money also increases. The scheme requires a person to recruit two others, who must each recruit two others, who must each recruit two others.

The "8-ball" model contains a total of 15 members. Note that unlike in the picture, the triangular setup in the cue game of eight-ball corresponds to an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15.
The "8-ball" model contains a total of 15 members. Note that unlike in the picture, the triangular setup in the cue game of eight-ball corresponds to an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15.

Prior instances of this scam have been called the "Plane Game" and the four tiers labelled as "captain", "co-pilot", "crew", and "passenger" to denote a person's level. Another instance was called the "Original Dinner Party" which labelled the tiers as "dessert", "main course", "side salad", and "entree". A person on the "dessert" course is the one at the top of the tree. Another variant "Treasure Traders" variously used gemology terms such as "polishers", "stone cutters" etc. or gems "rubies", "sapphires" etc. Image File history File links No higher resolution available. ... Eight ball players Eight ball is a billiards game played with a cue ball and 15 billiard balls on a pool table with 6 pockets. ... In mathematics, an arithmetic progression or arithmetic sequence is a sequence of numbers such that the difference of any two successive members of the sequence is a constant. ... Diagram showing the geometric series 1 + 1/2 + 1/4 + 1/8 + ... which converges to 2. ... Gemology (gemmology outside the United States) is the science, art and profession of identifying and evaluating gemstones. ...


Such schemes may try to downplay their pyramid nature by referring to themselves as "binary systems", or "gifting circles" with money being "gifted". Popular scams such as the "Women Empowering Women"[7] do exactly this. Joiners may even be told that "gifting" is a way to skirt around tax laws.


Whichever euphemism is used, there are 15 total people in four tiers (1 + 2 + 4 + 8) in the scheme - the person at the top of this tree is the "captain", the two below are "co-pilots", the four below are "crew" and the bottom eight joiners are the "passengers".


The eight passengers must each pay (or "gift") a sum (e.g. $1000) to join the scheme. This sum (e.g. $8000) goes to the captain who leaves, with everyone remaining moving up one tier. There are now two new captains so the group splits in two with each group requiring eight new passengers. A person who joins the scheme as a passenger will not see a return until they exit the scheme as a captain. This requires that 14 others have been persuaded to join underneath them.


As such, the bottom 3 tiers of the pyramid always lose their money when the scheme finally collapses. Consider a pyramid consisting of tiers with 1, 2, 4, 8, 16, 32 and 64 members. The highlighted section corresponds to the previous diagram.

No matter how large the model becomes before collapse, approximately 88% of all people will lose.
No matter how large the model becomes before collapse, approximately 88% of all people will lose.

If the scheme collapses at this point, only those in the 1, 2, 4 and 8 got out with a return. The remainder in the 16, 32, and 64 tier lose everything. 112 out of the total 127 members or 88% lost all of their money. Image File history File links No higher resolution available. ...


During a wave of pyramid activity, a surge frequently develops once a significant fraction of people know someone personally who exited with a $8000 payout for example. This spurs others to seek to get in on one of the many pyramids before the wave collapses.


The figures also hide the fact that the confidence trickster would make the lion's share of the money. They would do this by filling in the first 3 tiers (with 1, 2, and 4 people) with phoney names, ensuring they get the first 7 payouts, at 8 times the buy-in sum, without paying a single penny themselves. So if the buy-in were $1000, they would receive $56,000, paid for by the first 56 investors. They would continue to buy in underneath the real investors, and promote and prolong the scheme for as long as possible in order to allow them to skim even more from it before the collapse.


Other cons may also be effective. For example, rather than using fake names, a group of seven people may agree to form the top three layers of a pyramid without investing any money. They then work to recruit eight paying passengers, and pretend to follow the pyramid payout rules, but in reality split any money received. Ironically, though they are being conned, the eight paying passengers are not really getting anything less for their money than if they were buying into a 'legitimate' pyramid which had split off from a parent pyramid. They truly are now in a valid pyramid, and have the same opportunity to earn a windfall if they can successfully recruit enough new members and reach captain. This highlights the fact that by 'buying' in to a pyramid, passengers are not really obtaining anything of value they couldn't create themselves other than a vague sense of "legitimacy" or history of the pyramid, which may make it marginally easier to sell passenger seats below them.


In early 2006 Ireland was hit by a wave of schemes with major activity in Cork and Galway. Participants were asked to contribute €20,000 each to a "Liberty" scheme which followed the classic 8-ball model. Payments were made in Munich, Germany to skirt Irish tax laws concerning gifts. Spin-off schemes called "Speedball" and "People in Profit" prompted a number of violent incidents and calls were made by politicians to tighten existing legislation.[8] Ireland has launched a website to better educate consumers to pyramid schemes and other scams.[9] Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... This article is about the city in the Republic of Ireland. ... WGS-84 (GPS) Coordinates: , Irish Grid Reference M300256 Statistics Province: Connacht County: Dáil Éireann: Galway West European Parliament: North-West Dialling Code: 091 Postal District(s): G Area: 50. ... For other uses, see Munich (disambiguation). ...


Matrix schemes

Main article: Matrix scheme

Matrix schemes use the same fraudulent non-sustainable system as a pyramid; here, the victims pay to join a waiting list for a desirable product which only a fraction of them can ever receive. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse. Such schemes operate as a queue, where the person at head of the queue receives an item such as a television, games console, digital camcorder, etc. when a certain number of new people join the end of the queue. For example ten joiners may be required for the person at the front to receive their item and leave the queue. Each joiner is required to buy an expensive but worthless item, such as an e-book, for their position in the queue. The scheme organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. Organizers can further profit by starting a scheme with a queue with shill names that must be cleared out before genuine people get to the front. The scheme collapses when no more people are willing to join the queue. Schemes may not reveal, or may attempt to exaggerate, a prospective joiner's queue position which essentially means the scheme is a lottery. Some countries have ruled that matrix schemes are illegal on that basis. A matrix scheme, also known as a Matrix Site, Elevator Scheme, Escalator Scheme or Ladder Scheme, is a business model involving the exchange of money for a certain product with a side bonus of being added to a waiting list for a product of greater value than the amount given. ...


References

  1. ^ The Rise and Fall of Albania's Pyramid Schemes Christopher Jarvis, imf.org
  2. ^ Pyramid Schemes Debra A. Valentine, General Counsel, Federal Trade Commission
  3. ^ Trade Practices Amandment Act (No. 1) 2002 Trade Practices Act 1974 (Cth) ss 65AAA - 65AAE, 75AZO
  4. ^ Laws and Regulations Covering Multi-Level Marketing Programs and Pyramid Schemes Consumer Fraud Reporting.com
  5. ^ FTC Charges Internet Mall Is a Pyramid Scam Federal Trade Commission
  6. ^ Multilevel Marketing Plans Federal Trade Commission
  7. ^ Pyramid selling scam that preys on women to be banned
  8. ^ Gardaí hold firearm after pyramid scheme incident Irish Examiner
  9. ^ National Consumer Agency Ireland

See also

Autosurfing is a form of advertisement that automatically rotates ads in ones Internet browser. ... BurnLounge, Inc. ... The term Large Group Awareness Training (or LGAT) refers to training offered by some groups in what is often referred to as the human potential movement. ... A High Yield Investment Program, or HYIP, is a type of pyramid scheme normally offered via the Internet. ... Holiday Magic, a multi-level marketing organisation founded by William Penn Patrick ( - 1973) in the United States, played a role in the development of LGATs. ... A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns (profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. ...  (born October 15, 1944) is the Prime Minister of the Republic of Albania. ... Make money fast is a title of an electronically forwarded chain letter which became so infamous that the term is now used to describe all sorts of chain letters forwarded over the Internet, by e-mail spam or Usenet newsgroups. ...

External links

Scam and Confidence Man redirect here. ... Scam and Confidence Man redirect here. ... The victim of a confidence game or magic trick is often called the mark, or the vic. ... A shill is an associate of a person selling goods or services who pretends no association to the seller and assumes the air of an enthusiastic customer. ... A sucker list is a list of persons who have previously been successfully solicited for something. ... Image File history File links Conjurer_Bosch. ... An advance fee fraud is a confidence trick in which the target is persuaded to advance relatively small sums of money in the hope of realizing a much larger gain. ... The Badger game is an extortion scheme, often perpetrated on married men, in which the victim or mark is deliberately coerced into a compromising position then threatened with public exposure of his acts unless blackmail money is paid. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... The Bogus Escrow scam is a straightforward confidence trick in which a scammer operates a bogus escrow service. ... A clip joint is an establishment, usually a strip club or entertainment bar, typically one claiming to offer adult entertainment, in which customers are tricked into paying money and receive poor, or no, goods or services in return. ... The Drop Swindle was a con game commonly used during the 19th and 20th centuries. ... The Embarrassing Cheque is a confidence trick which may also be an urban legend. ... Employment scams, also know as job scams, are a form of advance fee fraud scamming where certain unscrupulous persons posing as recruiters and/or employers offer attractive employment opportunities which require the job seeker to pay them money in advance, usually under the guise of work visas, travel expenses, and... Hustling is the deceptive act of disguising ones skill in a sport or game with the intent of luring someone of probably lesser skill into gambling (or gambling for higher than current stakes) with the hustler, as a form of confidence trick. ... The penny-and-dime scam is a scam typically targeted at banks and large retail stores. ... Pig-in-a-poke refers to a scam originating in the late middle ages, when meat was scarce, but apparently rats and cats were not. ... Pigeon drop is the name of a confidence trick in which a mark or pigeon is convinced to give up a sum of money in order to secure the rights to a larger sum of money, or more valuable object. ... Reloading is a form of fraud, whereby a victim of one scam is repeatedly approached with more aggressive con artists, often until sucked dry. This form of fraud is especially hurtful for senior people, because they are more susceptible to pressure after the first losses, partly because of hopes to... A shell game is performed with bottle caps on a cardboard box, on Fulton Street in New York City The Conjurer by Hieronymus Bosch. ... The Slave Reparations Act (also called the Slavery Reparation Tax Credit, Black Tax Credit or Black Inheritance Tax Refund) is a tax fraud related to the concept of reparations for slavery. ... The Spanish Prisoner is a confidence game dating back to 1588 [1]. In its original form, the confidence artist (con-man) tells his victim (the mark) that he is in correspondence with a wealthy person of high estate who has been imprisoned in Spain (originally by King Philip II) under... The Thai Gem Scam is a confidence trick performed in Bankok, Thailand. ... This article does not cite any references or sources. ... White van speakers is a scam sales technique in which a salesman makes a buyer believe he is getting a good price on audio merchandise. ... A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns (profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. ... Dona Branca Dona Branca (full name: María Branca dos Santos; often referred to as The peoples banker. ... Caritas was a Ponzi scheme in the early 1990s in Romania. ... Charles Ponzi (March 3, 1882–January 18, 1949) was an Italian immigrant to the United States who became one of the greatest swindlers in American history. ... Bernard Bernie Cornfeld (Istanbul 17 August 1927 - London 27 February 1995) was a prominent businessman and international financier who sold investments in US mutual funds. ... This article or section is not written in the formal tone expected of an encyclopedia article. ... A High-Yield Investment Program (HYIP) is a type of Pyramid Scheme. ... Investors Overseas Services (IOS) was founded in 1955 by financier Bernard Cornfeld. ... Make money fast is a title of an electronically forwarded chain letter which became so infamous that the term is now used to describe all sorts of chain letters forwarded over the Internet, by e-mail spam or Usenet newsgroups. ... Reed Slatkin is the perpetrator of the largest Ponzi scheme in the United States since that conducted by Ponzi himself. ... Frank William Abagnale, Jr. ... Aerison in drag Storme Aerison is a con artist who gained notoriety in the 1990s for repeatedly impersonating a female highschool student and later representing himself to be a supermodel. ... Tino De Angelis was a New York-based commodities trader who bought and sold vegetable oil futures around the world. ... Philip Arnold (1829 - 1878) was a con man from Elizabethtown, Kentucky, who was the brains behind a legendary 1872 scam to fool people into investing in western diamond mining operations. ... Julius Nicky W. Arnstein (??? - October 2, 1965) was an American businessman, professional gambler, and con artist. ... Lou The Fixer Blonger (May 13, 1849–April 20, 1924), born Louis Belonger, was a Civil War veteran, saloonkeeper, detective and well-known gambler, but is most often noted as the organizer of an extensive ring of confidence tricksters in Denver that operated for more than 25 years. ... Edward Big Ed Burns, was an american 19th century confidence man and crime boss. ... David Race Bannon (born 1963) is a pseudonym for David Wayne Dilley, an American fraudster who posed as a former Interpol agent and wrote fictional accounts of his alleged adventures in various Asian countries, as well as other subjects including Asian politics, and computer science. ... Matthew Bevan Cox (born July 2, 1969), commonly known as Matthew Cox, also sometimes known as Matthew B. Cox and Matt Cox, is an American convicted felon and con man who has been convicted of conspiracy and grand theft. ... Louis Enricht (????-1923) was a US inventor who claimed that he had invented a substitute for gasoline. ... Billie Sol Estes (born 1924) was a scandal-ridden Texas-based financier best known for his association with US President Lyndon B. Johnson and for accusing Johnson of a variety of crimes, including the assassination of John F. Kennedy. ... Peter Foster addressing the media at the height of Cheriegate. Peter Foster, (born in Australia on 26 September 1962) has been described as the ultimate international man of mischief[1] , a super salesman to some, conman to others, but undoubtedly a person who has lived a champagne lifestyle in the... On the cover of his step-brothers 2001 book Son of a Grifter: The Twisted Tale of Sante and Kenny Kimes, the Most Notorious Con Artists in America Kenny Kimes (born 1975) is an American con artist serving a life sentence for murder. ... Sante Kimes (pronounced SHAWN-TAY) is an American serial killer who is most famous for the murder of Irene Silverman, a New York City socialite. ... Henri Lemoine ( 1905–1908) was a French con artist who claimed to be able to produce synthetic diamonds. ... Victor Lustig (January 4, 1890 – March 11, 1947) is held to have been one of the most talented confidence tricksters who ever lived. ... Gregor MacGregor (December 24, 1786 – early December 3, 1845) was a Scottish soldier, adventurer and colonizer who fought in the South American struggle for independence. ... George Parker (1870-1936) was one of the most audacious con men in American history. ... Steven Jay Russell (born 1958) is a US con artist and impostor who has escaped from prison number of times. ... Jefferson Randolph (Soapy) Smith II (1860-July 8, 1898) was an American con artist and gangster who had a major hand in the organized criminal operations of Denver, Colorado, Creede, Colorado, and Skagway, Alaska from 1879 to 1898. ... Alvin Clarence Thomas sometimes known as the character he created, Titanic Thompson, (1892 - 1974), was the legendary American golfer, gambler, and, uniquely gifted, hustler. ... For other persons named William Thompson, see William Thompson (disambiguation). ... Joseph Yellow Kid Weil (1877-1975) was one of the most famous American confidence men of his era. ...

  Results from FactBites:
 
The Capitalist Pyramid Scheme | intexile's blog | blogs | Industrial Workers of the World (1634 words)
Some capitalist apologists like to point out that using a pyramid as a metaphor oversimplifies the situation, because there are workers who also own (a largely insignificant amount of) stocks and bonds, and therefore they may be at the bottom of one pyramid while also being at or near the top of other pyramids.
Pyramids are to an extent, stable, but that stability is a stability of equilibrium, rather than a static stability (meaning that the structure is maintained regardless of what happens to its component parts, even if it means that a vast majority of the parts are used, abused, and then replaced unceremoniously).
Pyramids offer no such freedom for the vast majority at or near the foundation, nor is there really much peace of mind in backstabbing one’s way to the top (and most never succeed in that course anyway).
Pyramid scheme (1665 words)
Pyramid schemes have existed for at least a century.
Particularly notorious were the MMM Pyramid schemes in Russia and pyramid schemes in Albania.
Pyramid schemes are representative of an unsustainable economic model, due to market saturation.
  More results at FactBites »

 
 

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