Beware of Pyramid Schemes

By Jason Robinson, Fall 2015 Student Intern

Pyramid schemes are one of a number of tactics fraudsters use to prey on unsuspecting investors. There are key warning signs that investors should look out for to detect a pitch that could be an illegal pyramid scheme. Pyramid schemes function by rewarding participants for attracting more investors to the scheme. Unlike the typical business, these schemes focus more on attracting other investors and less on selling a product. These schemes often require participants to buy products in order to remain in good standing with the company. The earnings are funneled to a select few who run the scheme at the expense of the majority of participants. Often, the individuals behind the scheme promise monetary gains and a luxurious lifestyle. The Federal Trade Commission offers more information on pyramid schemes here.

Recently, the Federal Trade Commission unraveled an alleged pyramid scheme that went by the name Vemma. Vemma used social media and other marketing strategies to attract young adults to participate in a company that “sold health and wellness drinks.” Participants made an initial investment of $500-600 and received a package of sample products and business tools. The victims received little guidance about how to sell the products. Vemma then encouraged the victims to continue making monthly payments and enroll others into the scheme. In the Federal Trade Commission’s complaint, Vemma is charged with running a pyramid scheme, making false earnings claims, failing to disclose that the company’s structure ensures that most members who join will not earn substantial income, and furnishing affiliates with false and misleading materials to recruit others.