Ponzis and Pyramids on the Rise

Two recent news articles provide insight into the recent proliferation of Ponzi and Pyramid Schemes.

I was interviewed by the Wall Street Journal about the sudden revelation of more Ponzis on Wall Street.

A reporter for the State Journal Register, the dally newspaper of the capital of Illinois, interviewed me and used Pyramid Scheme Alert's work as the centerpiece of his article on the same subject but included the spread of Pyramids schemes on Main Street.

These articles reflect a growing realization that:

* pyramids and ponzis have become imbedded in the economy;
* the Recession is spawning more scams, and attempts by investors to withdraw funds reveal previously hidden, existing ones;
* they affect nearly everyone;
* they are seldom prosecuted by the government regulators unless they collapse (after maximum damage has occurred);
* they are dressed up in the garbs of the respectable, legitimate, pious and patriotic;
* recognizing them is increasingly difficult for the average person;
* the "endless chain", which used to be understood as classic fraud, is now treated as a legitimate "marketing tool" or "compensation plan."
* The pyramid is now a business model.

Here are other insights we have gathered in studying these types of scams over the last 10 years:

-- What occurs on Wall Street is mirrored on Main St.

-- The SEC which mostly regulates Wall Street and the FTC, which is supposed to watch out for Main St., both changed dramatically under the Bush administration regarding oversight of pyramids and Ponzis.

-- One main reason for the sudden reversal in regulatory protection is the development in recent years of large businesses that now openly use the endless chain as part of their business model. These companies lobby vigorously against enforcement of anti-pyramid laws or the continuation of previous enforcement policies toward such schemes. In the pyramid selling world, this was carried out mostly by the Direct Selling Association. Its largest member, Amway, was the largest client of the law firm that Bush's first SEC Chair, Timothy Muris, represented. He now lobbies for pyramid selling schemes to the FTC, urging against regulation. Amway is the target of a large class action case against it that charges it is a pyramid scheme. It is also currently prosecuted in England as a pyramid scheme and in India as well. The multi-level marketing model that Amway invented is now banned in China as a pyramid fraud.

-- In the securities investment world, Ponzis are greatly aided by laxness in accounting standards, as the Enron collapse showed, and by an understaffed and weak SEC.

-- When you have a major lobbying force directly working against endless chain or ponzi law enforcement, the ramifications spread. Many other scams develop under the protection of the lobbyists. And in the absence of oversight, new scams develop and legal businesses morph into Ponzis.

-- Ponzis reflect lack of confidence in the legitimate mainstream economy. MLM companies regularly tell consumers that the Social Security system will collapse, Corporate America is ruthless and uncaring, traditional professions are dead-end; and the stock market is rigged. Only the MLM systems can save them, consumers are told. Now, this climate of mistrust in banks and Wall Street is permeating society, making scams appear more believable. In other countries, lack of confidence in the mainstream economy has existed for years. Recently, 2 million Colombians were defrauded in a Ponzi that claimed it was a "bank." Colombians fell for the scheme partly because they did not trust real banks and believed that a fairer opportunity might exist outside the conventional market.

We now have all the elements for a perfect storm in which Pyramid and Ponzi can flourish:

-- Many new investors desperately seeking income or cash due to job loss and depletion of savings and housing values.
-- More and more disguises for scams -- hedge funds, "direct selling", “business opportunity”, etc.
-- Weak regulation
-- Declining public faith in the job market, corporate America, banks and Wall Street.
-- Declining understanding of the public about the nature of endless chain or Ponzi fraud. This declining understanding is also reflected in the media. Many journalists do not understand why pyramids are illegal or see the endless chain model as just another example of a buyer-beware marketplace. Many also don't understand the exponential math used to trick consumers into thinking everyone has an actual chance to recruit a "downline" on which they can gain commissions. They therefore don’t grasp the nature of the fraud. (With each person recruiting just two other people, the continued expansion would saturate the earth in about 30 recruitment cycles.)