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.
|
|
Previous