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MIAMI AND FORT LAUDERDALE
CRIMINAL ATTORNEY
Attorney
Representation in Miami, Florida Since 1984
Ponzi
schemes (or multi-level marketing programs or systems)
are not considered per se deceptive and unlawful.
In contrast, pyramid schemes are said to be inherently
fraudulent because they must eventually collapse.
Like chain letters, pyramid schemes may make money
for those at the top of the chain or pyramid, but
must end up disappointing those at the bottom who
can find no recruits.
Multi-level marketing systems pose less risk of
harm to investors and the public, however, and authorities
permit these programs to operate even though the
programs contain some elements of a pyramid scheme.
Courts and legislatures recognize a distinction
between legitimate programs (multi-level marketing
systems) and illegal schemes (pyramid or Ponzi schemes).
Multi-level marketing programs survive by making
money off product sales, not new recruits. In contrast,
"pyramid schemes" reward participants for including
other people to join the program; over time, the
hierarchy of participants resembles a pyramid as
newer, larger layers of participants join the established
structure. Ponzi schemes operate strictly by paying
earlier investors with money tendered by later investors.
No clear line separates illegal pyramid schemes
from legitimate multi-level marketing programs.
To differentiate the two, regulators evaluate the
marketing strategy (e.g., emphasis on recruitment
versus sales) and the percent of product sold compared
with the percent of commissions granted. See In
Re Amway Corp., 93 F.T.C. 618, 716 (1979).
Many statutes and opinions use "pyramid scheme"
to refer to a combination of pyramid structures
(programs that reward participants for inducing
other people to join the program) and "Ponzi schemes"
(programs that pay earlier investors with money
tendered by later investors). Regulation of these
combination schemes has been enacted because the
programs will inevitably harm later investors.
The Federal Trade Commission has established a test
for determining what constitutes a pyramid scheme.
Such contrivances are characterized by the payment
by participants of money to the company in return
for which they receive (1) the right to sell a product
and (2) the right to receive in return for recruiting
other participants into the program rewards which
are unrelated to sale of the product to ultimate
users.
A pyramid scheme is any plan, program, device, scheme,
or other process characterized by: (1) the payment
by participants of money; (2) to the company; (3)
in return for which they receive the right to sell
a product and the right to receive in return for
recruiting other participants into the program;
(4) rewards which are unrelated to the sale of the
product to ultimate users.
Offering, operating, or participating in, any marketing
or sales plan or program wherein a participant is
given or promised compensation: (1) for inducing
other persons to become participants in the plan
or program, or (2) when a person induced by the
participant in the plan or program. This is provided,
that the term "compensation," as used in the above
sentence, does not mean any payment based on actually
consummated sales of goods or services to person
who are not participants in the plan or program
and who do not purchase such goods or services in
order to resell them. In Re Koscot Interplanetary,
Inc. 86 F.T.C. 1106 (1975).
Koscot's second factor, which is that an illegal
pyramid rewards participants for recruitment, not
for sales, implies that saturation must occur thus
making the pyramid scheme inherently fraudulent
and therefore illegal. It is this factor which is
determinative in characterizing the plan or program
as legitimate or illegal.
Operation of a pyramid scheme constitutes fraud
for purposes of § 12(2) of the Securities Act of
1933, § 10 of the Securities Exchange Act of 1934
and various RICO predicative acts. Some of the most
commonly charged criminal acts associated with Multi-Level
Marketing systems are: (1) Mail Fraud, (2) Wire
Fraud, (3) Securities Fraud, and (4) Money Laundering.
Potential Punishment:
One may be found guilty of a felony, imprisoned
for up to 5 years and fined up to $250,000.
Frequently, the prosecuting Assistant U.S. Attorney
(AUSA) will secure a Federal Indictment from a Federal
Grand Jury and charge a defendant not only with
multi-level marketing crimes, but also with bank
fraud, RICO crimes and conspiracy to commit the
aforementioned crimes. One should also be aware
that since 1987 parole has been abolished in the
Federal System. Expungement (removal of conviction
from public records) is also not available.
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