Pyramid scams have been perpetrated for decades, leaving hundreds of thousands of ordinary people destroyed and cheated out of their hard-earned savings, with false promises of instant wealth, long-term income streams and many other inducements. In literally every case, nobody except the people who start these scams ever earn any money and the wealth they actually make is on the back of the misery of their victims.
A pyramid scam works on the basis of a person recruiting a number of people who pay him a percentage of the money they get from recruiting others. A diagram of the operation of such a scheme resembles a pyramid. For instance, one person recruits ten people who then each recruit ten people and so on, then the person at the top of the pyramid receives an income from all those below him and the people immediately in the pyramid below him receive a lesser income, all received from the people down the bottom, who are busy recruiting people below them.
Anybody with a modicum of logic can see that pyramid scams cannot be sustained in the long term, simply because there are not enough people that will continue to participate in them. For example, assuming that it is a perfect scheme and nobody drops out, if each person recruits ten people, at the tenth level down there would be one billion people at the lowest level of the pyramid. Of course this is never going to happen. Even if each person only recruits three people, at the tenth level there would be around 60,000 people out there, all trying to recruit others into the scam.
Pyramid scams do not sell products, only false hope to greedy or gullible people, so they have been made illegal in most civilised countries. Some very smart operators have worked out a way to get around pyramid scam laws by actually selling products using the pyramid model. They call their schemes Multi-Level Marketing (MLM). They promote quick wealth, diverse income streams, working smarter, easy retirement and many other buzzwords and phrases to entice the suckers.
The problem is that although these MLM schemes all have products to sell, these are literally only there to legitimise an otherwise illegitimate scam. The main income that the operators of MLMs derive comes from the people below them recruiting more people and selling them motivational and inspirational material to keep their hopes up for as long as possible. In many cases, the products that are used to legitimise the scams are overpriced and are hard to sell.
Any normal business venture has to use a marketing model of product versus clientele. Oversupply of goods will cost the business money, Not enough goods will cause the loss of potential clients. Competition from other companies will reduce the amount of goods that businesses can sell. So they have to maintain a good balance between the factors that affect their operations, but the one underlying principle of any business is to never create competition for itself. Even franchise operators must be extremely careful to allot exclusive operating areas to franchisees.
MLM scams are the complete opposite of normal businesses. A person recruiting others to ostensibly market the same product in the same marketplace is creating competition for himself. If he recruits ten friends, chances are that those ten friends have some common acquaintances to the recruiter, therefore shrinking his chances of selling any product to them. In any case, the whole MLM or pyramid scam is not self-sustaining because there are only a finite number of people that can be recruited. The common factor with MLMs is that they never show the down-side, but dangle the bait of financial success and independence, coupled with self-esteem that comes from being successful and other very clever ploys. They never ever show how their scams fleece the gullible and how many victims have been impoverished by their manipulation of the truth.
Robert Blakey, Professor of Law at Notre Dame University in the USA, one of the world's leading authorities on organised crime, was retained in a significant lawsuit between well-known manufacturer of household cleaning products Proctor and Gamble and notorious MLM company Amway Corporation. Blakey came to the conclusion that Amway's structure is a close parallel to that of the American Mafia. Proctor and Gamble claimed that the Amway Sales and Marketing Plan is a pyramid scheme, consumers are induced through false promises of wealth and other misrepresentations to join Amway, distributors and potential distributors are induced, through misrepresentations, to purchase motivational tools and to attend motivational rallies. It was also alleged that Amway had a history of illegal and criminal behaviour.
In the case of Amway, I have had a number of personal experiences with acquaintances trying to recruit me into being a distributor for Amway or even an E-commerce company called A2K. In not one instance was I informed that this company was a front for Amway until I pressured the acquaintances into revealing this fact. When I demanded that these people produce evidence that they had actually made the amount of money that they claimed they were earning from the MLM scheme, they all failed to show that they had made anything whatsoever. They always refused to produce bank statements to back up their claims of making money. Then their stories invariably changed to anecdotal accounts of their friends and relatives who had allegedly made a fortune from being involved.
To this day, I do not recall any acquaintances who have made money from Amway or its associated companies such as A2K They were just very sad and sorry people who were duped into becoming involved with Amway, at the cost of their savings and the loss of many friends whom they sucked into these schemes in their ignorance.
In 2014, the multi-level marketing company Herbalife USA, which recruits individuals as distributors who sell its products to friends, family and other consumers, agreed to pay $A17.3 million to settle a class-action lawsuit alleging that its business model was a pyramid scheme. The suit was initiated by a Herbalife distributor in California, who said that the company violated that state's colourfully named Endless Chain Scheme Law.
"We are fully confident that we would have prevailed," Herbalife General Counsel Mark Friedman said in an e-mailed statement. "Settling this matter, however, is in the company's best interest, as it allows us to put it behind us and focus on the future growth of the company."
Former distributor Dana Bostick sued in April 2013, claiming that he could not sell his products because distributors who are higher up the chain receive a bigger discount than he did on the products they purchased from Herbalife. Bostick also claimed that Herbalife's structure systematically rewards recruiting other distributors over retail sales.
The allegation that Herbalife, founded in 1980, is a pyramid scheme was not limited to this case. A Federal Trade Commission investigation of the company was ongoing in 2014, as was a public-relations campaign by hedge funder Bill Ackman, who stated that he shorted the company's stock because he believed that its sales system was flawed.
This is how Herbalife operates. When a new Herbalife distributor is recruited, they purchase a chunk of Herbalife products, which it is then up to them to sell. One big question at issue is whether the company ultimately makes its money because there are "end users" out there consuming those products, or if what's actually happening is that new distributors are getting lured into buying big batches of stuff that they will never be able to get rid of. The company does allow distributors to return unsold products, but does so only under conditions that discourage many returns.
One irony in all of this, of course, is that even if there are millions of Herbalife fans paying for and using the company's "Cell Activators" and "Male Factor 1000" pills, those people may just be paying for the placebo effect, if anything at all. As a manufacturer of supplements, Herbalife's products are not required to undergo FDA-regulated clinical trials and are sold with the warning that they are not intended to treat, prevent, or cure disease.
The very fact that Herbalife was prepared to settle a lawsuit for a whopping A$17.3 million merely showed that this company was not prepared to have its grubby pyramid-type marketing exposed to the world and most probably would have prompted US authorities to close it down. Herbalife's products are overpriced, not clinically trialled and come with the disclaimer that they are not intended to do anything except relieve the buyers of their money.
In April 2016, a group of multi-level marketing scammers from Britain made off with an estimated $5 million from everyday Australians after a "cashback shopping" scheme collapsed. Go Aspire Ltd, formerly Aspire Worldwide, went into insolvency months after investors' so-called "franchise agreements", some of which had been purchased for hundreds of thousands of dollars, were exchanged for shares in the now worthless company.
More than 40 investors out of an estimated 1000 people affected sought legal advice and asked the Australian Competition Consumer Commission and the Australian Securities and Investments Commission for help. Unsurprisingly, attempts to contact the two husband-and-wife duos responsible, founders Andrew Terence Hansen, 47, Wendy May Hansen, 45, Philip Gordon Watts, 68 and Sally Anne Watts, 52, have been unsuccessful. Legal experts discovered that nothing could be done for the victims.
It is unclear exactly how many investors lost money. One former member who compiled a database said that the current count was 698, but that did not include around 400 early members who were kicked out for not paying ongoing fees. Aspire, which deregistered its Australian arm in late 2015, purported to be a cashback loyalty scheme into which members, who paid between $3000 and $30,000 to join, were enticed with promises of earning money for doing nothing.
Members were promised they could earn so-called "passive income" by signing small businesses up to the payments system to create "micro shopping communities", while also earning commission for signing up other members. In theory, customers would be encouraged to make payments at participating stores using the Aspire system. The commission paid to the Aspire franchisee who signed up the store would be charged instead of a credit card processing fee.
The franchise agreements supposedly gave the holder the right to sign up small businesses in their local area. In one promotional video from 2013, Hansen claimed that a typical member could "easily" be making more than $180,000 a year just by signing up eight or nine small businesses into the scheme.
Aspire appeared to follow the same model as the controversial Lyoness cashback shopping scheme, which the ACCC unsuccessfully attempted to prosecute for allegedly operating a pyramid scheme and engaging in referral selling. All four founders of Aspire were involved in the early promotion of the Lyoness scheme in Australia, in which many people lost thousands of dollars after promises of future income failed to materialise.
Adrian Simule, 29, first heard about Aspire in 2013 through a relative who had previously convinced him to invest $5000 in the collapsed Canadian pyramid scheme Banners Broker. Simule, from Dandenong in Victoria, left his successful trade as a self-employed caulker in the hope of becoming a business coach with Aspire. He bought in initially for $1600 and went about recruiting other members. "Then they started offering coach and mentor franchises for $22,000, then $26,000," he said. "Those people would basically be allocated the clients. They were saying, it's a second-to-none type of deal, no one else offers this."
Simule said that promises made by the company never seemed to eventuate. "There was supposed to be an Android app that never came out. There was supposed to be a credit card, but then they changed their mind, they said it was old technology," he said. He ultimately ended up spending just under $30,000, plus lost income and travel costs. "I spent my mortgage deposit money," he said. "I could have bought a house. I've lost the majority of my clients. People I used to be quite close to don't want to have anything to do with me because I was going around promoting Aspire. I even got my mum involved." Simule stated that his world has come crashing down. "I'm nearly 30 years old now, by this point I should already be going somewhere. I don't have anything to my name besides my car," he said.
A woman called Sue from Henley Brook in Western Australia said that she remortgaged her house to raise the $23,000 to buy into Aspire. She, too, quit her job with the dream of becoming a business coach. At one point she even sold all her jewellery, including her wedding and engagement rings, figuring that "when the money started coming in, I would buy the most expensive jewellery I could afford to replace them". The 46-year-old, who preferred not to divulge her last name, said that she earned just $500 for the entire year of 2015. "People have lost life savings, borrowed money from family members. It doesn't matter if you put in $1000 or $500,000, it's not right. They're very clever people. That money is gone. For me it's not about the money anymore, I just don't want them to do this to somebody else," she stated.
One Perth businessman, who did not wish to be named, lost more than $300,000 buying multiple coaching licences. "The business concept looked great but the actual technology wasn't working like they were claiming," he said. "The product was basically the Internet banking system that was going to be converted into an app. Very clumsy. They were supposed to spend millions of dollars on the development of it and they didn't. They sold the franchises before the product was actually finalised and developed. They were selling agreements way before there was anything in place."
The businessman described the entire saga as a "fucking mess". "It's an emotional mess, financial mess, relationship mess, business mess. It was all smoke and mirrors," he said. "Some people have lost their jobs, quit their jobs, can't get loans anymore, have lost relationships and friendships." He said that the majority of his time was spent recruiting other franchisees, "multi-level marketing stuff" and giving presentations to small business owners to convince them to sign up.
Craig Salamone, owner of The Iris restaurant in Jandakot, Western Australia, is one business owner who did get on board. He paid $3000 to become a franchisee, figuring it would bring in extra business. Luckily for him, by hosting Aspire meetings he managed to recoup his investment. "I paid $3000 for the franchise but I had a couple of functions where I probably put through about $4000, so I think I'm probably a little bit ahead," he said.
Salamone stated that while some commissions were going out to members to make it seem like it was legitimate, the system didn't really get off the ground at all. "People with training licences, they lost out big-time," he said. "I was probably one of the lucky ones."
According to multiple members, at one point the company claimed it had been approached with a takeover offer from one of the "Big Three", Visa, Amex or MasterCard. "We said, why didn't they take the offer? We asked, where's the proof?" Salamone said. He guessed that most of the money was spent on travel costs. "They did a big seminar in Dubai, they were doing a lot of travelling," he said. "Andy was coming out from the UK regularly. They hired out hotels regularly for seminars in Perth, Melbourne, Sydney, Brisbane, Adelaide to get it off the ground. That all takes money."
Lisa Smith, 43, a single mother from Perth, lost $29,000 in the scheme. "We were told we were going to be making $49,000 a month," she said. "They said we'd get paid to do public speaking, we'd get exposure all over the world. We got told so much stuff, you feel like a bit of an idiot looking back on it."
This case highlights the need for provisions around pyramid selling under the Australian Consumer Law to be strenghtened. Pyramid schemes are defined far too narrowly under the law. Multi-level marketing schemes are very risky and it can be very hard to get one's money back if things go wrong. But any changes to the law were too late for the victims of Aspire. There also need to be stronger provisions against unfair trading.
With any business venture, a potential investor has the job of conducting some due diligence, such as investigating the company in question, seeing if it really has a track record of success, whether its operators have been involved in previous dodgy schemes that collapsed and many other checks before one cent is laid out. But people are easily sucked in by very slick conmen and in the Aspire scam, it seems that a lot of people were fleeced by a gang of very smooth fraudsters who got away scot-free with their scam, while leaving their victims devastated.
There are many MLM scams out there and they should be avoided under all circumstances. If a friend or acquaintance suddenly tells you how you can attain financial independence the easy way, don't let them get any further - just tell them that you are not interested in MLM scams. If they persist by telling you that they are making great money out of it, demand to see their bank statements for the past year or so, to determine whether their actual income from the MLM exceeds the money they have spent being involved in it.
Apart from losing your own money and pride, getting involved in an MLM scam is probably the fastest way to lose all your friends. They will either resent you for trying to scam them if they know about MLMs, or even worse, they will hate you if you actually do recruit them and they lose their money, as nearly everybody has done. I have a standard line that I use on MLM recruiters. I tell them that when they have made their first million dollars from this MLM, they should send me their bank statements to prove it and I will gladly join up, but until then, go away.