The Fully Disclosed Fraud

Until recent years, to “prove” that an endless chain income or sales scheme was a fraud only required explaining that it was in fact an endless chain. In other words, endless chain schemes were understood to be “inherent” frauds. They are not good businesses gone bad or good people doing wrong. They are, by definition, frauds, custom-designed scams that must deceive and will always cheat the majority who join them. The fraud of endless chains may be reduced to a simple fact: They make a false promise, much like a “bait and switch” proposition does. That false promise is that everyone, always, has the opportunity to make unlimited money from an ever-expanding base of new investors.

On Wall Street, the losers are the latest investors, like those that got in at the end of Bernard Madoff’s Ponzi scheme. On Main Street, the losers are the latest to join at the bottom of the multi-level marketing schemes’ “downlines.” That group churns and turns over year after year. New people join each year filled with hope, just like the people that had joined last year, before they “failed” and quit.

The endless chain fraud is also called a pyramid scheme or a ponzi scheme or sometimes just “money transfer.” It is a simple and classic flim-flam. A product or reward is offered that requires:
(1) A payment/purchase/investment with a promise or offer of reward tied to the payment/purchase/investment.
(2) A reward (discount, free product, commission or cash) that is contingent on new people making the same payment or purchase or investment.

The reward depends on an ever-increasing number of people making the same investment or purchase. These new buyers/investors can be recruited by the earlier buyers/investors or they can be recruited directly by the scheme’s promoter. When the promoter does most of the recruiting, the scheme is often called a Ponzi. When the last investors to join have to find the new recruits themselves, usually from among their friends and neighbors, it is usually termed a pyramid.

Either way, in order for the “last ones in” to receive the rewards on their payments, purchases or investments, the chain must always expand. Of course, this cannot happen because there are limits to markets and the number of available participants. If the chain stops expanding to the required levels, the reward cannot be given; the commissions cannot be paid or the cash delivered. So, the last ones lose out on the income promise.

Since the number of people involved grows with each new level, the “last ones in” are always the great majority of all participants. Therefore, by design, most must and always will lose in an endless chain. This happens while the promoters falsely claim — and many of the participants erroneously believe — that the opportunity for reward never ends; everybody can win; “exponential” expansion ( 5, 25, 125, 625 … ) can make everyone rich if they just recruit more people who recruit more people, etc.

Whether the scheme promises dividends as in the Bernard Madoff scam, or a gift of cash as in the “gifting cubs” that are in many communities and on the internet, or a discounted or free product as promised in the “matrix buying clubs” that are all over the internet, or a “commission” based on the purchases and sales of a “downline” in multi-level marketing schemes, the fundamental fraud in all is the same. It is the same basic lie.

History and Evolution:
In 1920, the endless chain trick was used by a financier named Charles Ponzi to solicit cash investments and to pay high interest or dividend payments to early investors. Ponzi merely transferred money from later investors to earlier ones, giving the illusion of profits. To continue, he needed more and more investors, which he could not continue to recruit. Ponzi had to conceal the transfer and falsely claim that dividend payments were “profits.” Thousands of investors eventually lost their life savings. Ponzi went to prison. The financial investment type of “endless chain” schemes have been known ever since as “ponzi” schemes.

The first time that the endless chains moved from financial investments to the lives of average people was during the Depression in the 1930s. They were called “
chain letters” and “pyramid parties.” Usually these informal schemes required a very small investment, as little as a dime. They were treated as a parlor game, an innocent form of gambling. Each person sent payments to the person at the top of the chain letter, added their name to the bottom and then sent copies of the letter to more people. Like Ponzi’s plan, the chain letter was a continuous transfer of money from later “players” to earlier ones, and it required an ever-expanding number of new participants. Because the base expanded, each person was promised that much more money would be sent to them than they sent out. It was the magic of “duplication” and “exponential expansion,” they were told.

Unlike Ponzi, the chain letters and pyramid parties never hid the fact that they were only transferring money. Their trick was more subtle. They admitted that the rewards came directly from later participants, but they convinced people that the chain could continue
forever. Or, if the chain ever did break, it would probably harm someone else, not them. It would happen later, not now.

Ponzi showed that millions of dollars could be gained in a very short time with the endless chain trick. Chain letters showed that the endless chain trick could be fully revealed but many people could still be fooled by “exponential expansion” or the idea of a never-ending money supply. Chain letters also showed that many people could be lured with rewards that are actually based on the losses of others. They proved that it was not necessary to hide the transfer.

The chain letters opened the door to an entirely new marketing plan for Main Street businesses. In the 1960s endless chain propositions started showing up in the marketplace to sell products. They developed within the “direct selling” industry, which was already known for door-to-door trickery, “tin men” and smooth talking flim-flam artists. The plan involved paying a fee, buying and selling products, and recruiting others to do the same. Each new salesperson would recruit many other salespeople, who would recruit even more, etc., — forever and ever.

Those first endless chain sales schemes evolved into today’s “
multi-level marketing” (MLM) industry. As in the chain letters, the endless chain is not concealed. Rather it is promoted, championed and celebrated as a “unique” plan, the “greatest income opportunity in the world.” Income is said to be “limitless.”

With the growth of the MLM industry, the fraud of the endless chain became
fully disclosed, even touted. It was called a “business model.” But because it could not fulfill its promise of rewards to all and forever, it still needed disguises. It needed something to divert people’s attention from seeing the fraud that was right in front of their eyes and to explain away the enormous failures and losses that they cause.

In the chain letters, the basic fraud was disguised or diverted by the small amount of money. It was portrayed as an innocent “game.” The losses of others were minimized. The deception was winked at as part of the fun. Since you did not know where you were on the chain, and many understood that the “last ones in” would lose, “Get in early!” was the watchword. In the gifting clubs, the disguise was the facade of “giving and receiving,” not payment and reward.

Multi-level marketing created a more sophisticated disguise and has been refining it ever since. The basic disguise is “direct selling.” Each participant can recruit and profit from new participants as in the chain letters and gifting clubs, yes, but they can also sell on a retail basis. Retail selling or “direct selling” is the disguise that allows people to pretend they are not in a money transfer scheme based on endless expansion of the salespeople.

In fact, almost no one does retail the MLM products or, if they do retail, they cannot gain the advertised high incomes due to their high prices, low profit margin and the high cost and hard work involved. The direct selling disguise pretends that most salespeople make most of their money from personally retailing, rather than from the absolute requirement of recruiting more “salespeople” (buyers/investors).

The MLM product itself serves as another diversion from the endless chain proposition. MLMs are famous for miracle products, cancer cures, fountain of youth lotions, “Justice for all” insurance, and instant weight loss programs. The absurdly exaggerated or falsified attributes of ordinary products are an extension of the pretense of “direct selling”. In fact 40-50% of the product’s price is transferred to the recruiters and most of it goes straight to the top 1%, a classic money transfer or pyramid scheme. The driver for the “sales” and the recruiting is the endless chain income promise.

Endless chain sales schemes started showing up in the 1960s and by 1968, California led the country in trying to keep them out of the legitimate marketplace. California’s famous
“endless chain” law still is the standard for outlawing pyramid-selling frauds. Other states adopted similar statutes. However, by 1980, law enforcement was greatly reduced due to political influence-buying and a philosophy of “de-regulation.” Few schemes were prosecuted. Now, some of the laws have been weakened or gutted. The genie was let out of the bottle. MLM schemes exploded in size and number, followed by other variations such as “gifting schemes,” women-helping-women clubs, “auto-surfing” scams, “matrix-selling” and ponzi financial frauds all of which are proliferating with no law enforcement.

Today, the fraud of the endless chain is treated as no fraud at all, as long as it is disguised with products or “membership” or “gifts,” or “purchases,” all codes words to evade the law and coverup the fallacy of “unlimited” expansion. The deception that “everybody — always — has the same opportunity” is allowed to be advertised. The diversions of “direct selling” and “products” are promoted by PR companies, lobbyists and recruitment bloggers. The news media goes along.

Yet, a fraud is a fraud. The harm cannot be diminished by a disguise. Denial does not change reality. Millions lose their money now every year in MLM schemes or in their cousins, the gifting and matrix schemes, and they don’t know why they lose. Most accept the scheme’s explanations. They blame themselves.

To maintain the disguise and continue the recruitment, the losers must be explained away. Now, they are called lazy “quitters and losers” or merely “failures” caused by the “market.” Another line of explanation claims those who failed to make a profit in MLMs actually never wanted to make money. They were just happy to have bought the MLM products at a “discount”.