Monday, September 3, 2007


There are two types of pyramid schemes: one legitimate and the other illegitimate.
legal pyramids
The legitimate pyramid structure is often called a multi level marketing (MLM) organization. Its primary purpose of an MLM is to sell a product. There are many successful MLMs which sell encyclopaedias, soaps and cosmetics, among other items.. The return or earnings to the upper levels of the pyramid are from both the sale of the product and the recruiting of new salespersons. The return is generated from both one's own commission sales and also the commissions on sales of those one recruits.
Illegal Pyramids
In an illegitimate pyramid, the primary return to the upper level individuals is from recruiting of new levels rather than from the sale of a product. In this structure, the return is derived from recruiting others and not from commissions on the sale of any product. The illegitimate pyramid is often referred to as a Ponzi scheme, named after Charles Ponzi, an immigrant to Boston in 1919.
Ponzi Traded in Postage Stamps
Ponzi traded in pre paid postage coupons. He would purchase low rate coupons … and then sell them at a profit ... Desiring to leverage his own purchasing power, he solicited funds from investors, promising them a 40% return in three months. Unfortunately, there were not enough coupons in existence to support his large scale purchases. However, he continued to solicit and receive orders. Ponzi paid some of the investors their promised 40% return from funds collected from later investors. The scheme was perpetuated by the success stories of the payments to the original investors. According to the records, Ponzi made an investment of $50 of his own funds and fleeced $10 million from investors.
Robbing Peter to Pay Paul
The distinguishing feature of a Ponzi type pyramid is that old victims are paid back with funds received from new victims. As long as the fraud continues to grow, the investors are not usually aware that their money has been misappropriated. Most Ponzi schemes are uncovered when new "investors" can no longer be located. All Ponzi schemes, therefore, are pyramids. But not all pyramids are Ponzi schemes.
Entry Fees
Another distinction between legitimate and illegitimate pyramids is the entry fee. In a legitimate pyramid, the entry fee is generally small and used for acquiring a stock of inventory to be sold. In an illegitimate pyramid, however, the entry fees tend to be large and these fees are, in part, passed on to the recruiter.
The Return on Investment
A third difference between the two types of pyramids is the return one can expect. If it appears to be a "get rich quick" scheme, it probably is not legitimate. Abnormally high yields or returns for the amount of effort required is a tell tale sign of an illegitimate pyramid. In these cases, the sales pitch to the unsuspecting victim is that he will earn large amounts without much effort; all he has to do is recruit others to the program.
Golden Rules
The golden rules of illegitimate pyramids are as follows:
1. If it sounds too good to be true, it probably is.
2. Does the investment return sound better than what is offered in the marketplace?
3. Is the investor encouraged to reinvest the profits rather than take a payout?
4. The focus is on recruiting others, not the sale of a product.
5. Who endorsed the product, not the investment return?
6. The entry fee is large and no product (or little inventory) is received.
Generally, illegal pyramid schemes collapse of their own weight. The schemes often are not reported and, therefore, not prosecuted because individuals are embarrassed to admit that they were fleeced by a con artist. The illegitimate recruiter can be anyone: a friend, relative, neighbour, work peer, church member, or someone not known.

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