How Pyramid Schemes Ensnare Unsuspecting Victims

March 21st 2015

Dina Gachman

When you’re living paycheck-to-paycheck and struggling to afford rent and pay off your student loans, phrases like “get rich quick” and “the product sells itself” may sound pretty enticing. Under normal circumstances you may think you’d never fall victim to a pyramid scheme or a “multilevel marketing opportunity,” but when money is tight, we’re all just a little bit susceptible to schemes, no matter how practical we are under normal circumstances.

If you’re not familiar, a pyramid scheme is a fraudulent way of earning money that’s based on recruiting an increasing number of “investors.” The early participants recruit the investors, and they then recruit more investors. Oftentimes you’ll get paid more not just for selling the product but also for luring in new recruits, so early “investors” generally make a lot more money, while others may struggle to turn a profit -- hence the pyramid.

The product being hawked can be anything from vitamins to “miracle” anti-aging lotions to energy drinks, and right now over 10 million people are working either part-time or full-time in network marketing in the U.S., and there are approximately 20 million people doing this work worldwide. Making “easy money” sounds pretty tempting if you’re in school, struggling to find work, or raising a child and in need of a little extra income that’ll let you work from home. But, like the saying goes, if it sounds too good to be true – it probably is.

Take Claire S. (not her real name), who found herself mixed up in a scam in which she was told, many times, “The product sells itself!” Claire has a good job, but her husband’s job makes it impossible for her to work full-time and care for her kids. “I decided to try it after seeing a childhood friend have crazy success,” she says. “The idea of being able to work from home, in my spare time, really appealed to me.”

Claire's friend had “crazy” success because she was one of the first people recruited to sell the product, an organic face cream. Claire says they used a lot of practiced lingo like “residual income” and the ever popular “the product sells itself” to motivate her. She had to buy a “start-up kit” and order a certain amount of product each month in order to get commission for what she sold.

Unlike some, Claire stopped selling before she started losing large sums of money. She “came pretty close to breaking even” by the time she wised up, and she was lucky she didn’t hang on and lose even more of her own hard-earned cash.

Not all multilevel marketing opportunities are evil scams where a select few founders rake in millions while hundred of hapless victims go into debt. There are legit products that can help you earn extra cash if you have the stamina and resilience it takes to sell. Still, if you’re tempted by an opportunity that sounds a little too easy, make sure you do your homework before jumping in and buying a “start up kit” of your own.

According to the FBI’s website, one way to avoid falling for a pyramid scheme is to be “wary of ‘opportunities’ to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment.” It sounds simple, but millions of us still fall for the scams in the hopes of bolstering our bank accounts.

Unlike Claire, Sandra L. (also not her real name) didn’t hear about the pyramid scheme she got involved in through a friend. She was recruited via a letter she received in the mail. The letter offered an opportunity to start her own home-based business and make money by selling recipes. “I was studying gourmet cooking at the time so it definitely grabbed my attention,” she says, which makes you wonder how the company just happened to target the perfect recruit.

At the time, Sandra was 23-years-old, pregnant and jobless, so she wanted something flexible so that she could continue studying and make money. “It seemed easy and fun. It seemed innocent enough,” she says.

She was told to send letters to people and in turn they would pay two dollars per recipe, for five recipes. It didn’t sound illegal or seedy, plus she had that passion for cooking, so Sandra didn’t really think about the consequences. In the end, she lost five hundred dollars selling those recipes and mailing letters trying to recruit other to do the same. She also received a “strange letter from the state of Tennessee” stating that a complaint had been made about her concerning the letter that she had sent out. “It was enough to make me very nervous.”

Sandra didn’t sign any contracts, so walking away from the scam was a pain-free process – besides the significant chunk of change she lost, of course.

The bottom line is that if you’re approached about selling anything from home, whether it’s recipes or cosmetics or an energy drink, don’t blindly agree to anything – especially if they’re asking you to put money in. Do your research, find out if they’re legitimate (talking to people who work for them doesn’t count – if it’s a pyramid scheme they’ll say whatever they can to get you to come on board), and only commit if they’re on the up-and-up and you don’t have to sign any type of binding contract. And really, very few products sell themselves. If it were that easy to make a living, everyone would be doing it – and we’d all be making tons of money.

As Sandra learned after her experience, “Anything worth having is worth the work.” The problem with pyramid schemes is that they make it sound just a little too easy.