Multi-level Marketing and Ponzi games







  1. 1. Multi-level Marketing and Ponzi games
  2. Who was Charles Ponzi? Why is he famous? How did his “Ponzi-scheme work? Why did people continue to send money to Charles Ponzi to invest for them even after he was convicted and sent to prison? How could intelligent people be so stupid & gullible?

Charles Ponzi was an Italian immigrant to America who first settled in Canada, with only $2.5 to begin life in a foreign nation (Perkins, p. 141).  Charles Ponzi, in his life got convicted of several crimes including forgeries, frauds, and smuggling illegal Italian aliens to the U.S.  However Charles Ponzi is most famous for his famous swindle –the Ponzi scheme, the most known con scam of all time (Perkins, p. 143).

The Ponzi scheme involved investment in international reply coupons (IRCs) which were offered to investors at a 50 percent return payable within 90 days as opposed to the 5 percent offered by banks in saving accounts (Perkins, p. 142).  Realistically, this was impossible because the profit margin in mail coupons was minimal but Ponzi paid old investors with money from the new investors and these attracted more investors. Ponzi exploited the differences between the U.S and foreign currencies to buy and sell the coupons for a larger profit and made an estimate of $250, 000 a day from the investments.  However, new investors were at risk of losing their contribution because Ponzi did not have and investment of his own in the firm (Perkins, p. 143).

Ironically, people continued to send money to Ponzi even after his previous convictions of forgeries and smuggling.  Ponzi had introduced a get-rich-quick scheme that seemed to work at first and this was attractive to the rich and intelligent (Perkins, p. 143). People become gullible because of the desire to get rich quick and without much hustle.

  1. Why do people continue to fall victim to the basic lures of Ponzi investment scheme? Modern con-men continue to use his investment formula to gain riches!

            People forget quickly especially when there is a promise of quick wealth in economic difficulties.  Moreover the first investors to the scheme usually get paid as per the terms and this motivates others to join in the hope that they will become richer if they also recruit other people (Rhee, p. 364).  Moreover, most people are recruited by the people whom they know and trust and therefore become quick to join (Misur, p.1).

  1. Probably the most famous current example of a Ponzi-game is the Madoff Pyramid scheme. How did the Madoff investment scheme work? How could so many people fall victim to this investment fraud? How much did Bernie Madoff get away with?

Madoff’s Ponzi scheme has been termed the new era of economic catastrophe which can only be equated to recklessness and malfeasance in the entire financial industry (Rhee, p. 365).  Madoff’s scheme was like Ponzi’s such that it includes the rich and intelligent from credible financial institutions.

Madoff scheme involved the use of hedge funds as intermediary in which the fund managers could reap an enormous return from the hedge fund fees for simply directing the money to Madoff (Rhee, p. 366).  Madoff’s hedge fund investors were provided for with 12 percent net return, of which they pocket 1 percent of asset management and 20 percent of profit from the investor fees (Rhee, p. 365). Returns were kept moderate and paid in time.     Many people got trapped in Madoff’s scheme probably because he was a highly respected, established and an esteemed financial expert, plus Madoff ran legal businesses alongside the fraudulent (Rhee, p. 368).  Moreover, the SEC failed to get evidence that would convict Madoff of fraud when Markopolos initially requested that Madoff be investigated (Rhee, p. 368).  Madoff was not discovered until he confessed the crime himself.  Madoff got away with over $65 billion in just two decades (Rhee, p. 366).

  1. Multi-level marketing and/or network marketing, and pyramid schemes
  2. What is a pyramid scheme? How does it work compared to the classic Ponzi-game? Who gets rich in a pyramid scheme? Why are these schemes doomed to failure?

A pyramid scheme an illegal financial investment scheme in which there are purported profits based on an investors ability to recruit other potential investors to the program (FTC, Para. 3). A pyramid usually starts with one or a few people and expands in size as newer people are recruited, hence the name pyramid.

A pyramid scheme compares to Ponzi’s game in that there is continual recruitment of investors, and there is promise to deliver high returns within a short period (FTC, Para. 5). However, in the Ponzi game, Ponzi did not have any product or investment of his own in the scheme, while with pyramids; some investors include products for sale although this could be a disguise (FTC, Para, 4).

Those who get rich are early investors or those at the top of the pyramid hierarchy as they reap all the benefits derived from the fees that later investors bring in after being recruited (FTC, Para. 4).  Later investors only start to earn when they have also recruited other investors.

Pyramid schemes are doomed to fail with time because the number of people that need to be paid become too many as the pyramid widens and hence the mode of payment cannot sustain the all members (FTC, Para, 5).  Just like in Ponzi and Madoff’s case, the collapses occur at the peak of the fraud when there is a steady flow of redemptions to the many investors.

  1. Is it possible to operate a legal network marketing program? What are the current FTC and court decisions on the legality of Network marketing and/or multilevel marketing programs?

It is possible to operate a legal network marketing program as long as the network meets FTC’s requirements that define against illegal pyramid schemes (FTC, Para 4).  Several multilevel marketing programs nowadays entail owners who have invested in real company products (FTC, Para, 21).

The Federal Trade Commission and court decisions stated that multi-level marketing (MLM) is legal and only becomes illegal when the following occur:- first, when there are greater incentives for recruitment than sale of products, for instance, where the distributors are more pressured to recruit newer distributors (FTC, Para.4).  Secondly, when high entrance fees are charged to recruits with a promised of purported benefits that are not evident in the present.  Third, the MLM is fraudulent when the new recruits are expected to buy expensive inventories without a market having established a market into which they can sell (FTC, Para.4).  This is risky because when the scheme collapses, the bottom pyramid members suffer excruciating losses (FTC, Para 4).

Example of legal cases that involved the courts and network marketing include the In re Koscot Interplanetary, Inc., which involved a firm that offered people the opportunity o become beauty advisors and sell cosmetics (FTC, Para. 4).  However, the incentives were not given from the retail sales but from high fees to entrants and purchase on inventories, and these suits the FTC’s categorization of illegal schemes. For instance, one was asked to pay $2000 and purchase $5400 worth of Koscot cosmetics for the title of supervisor (FTC, Para. 19).

Another case, In re Amway Corp, involved Amway, a dealer in kitchen appliances where the distributors purchased the products at wholesale price from the person who recruited them while the top distributor purchased from the firm itself (FTC Para. 21).  The firm was suspected to be an illegal pyramid scheme because the distributors earned returns from recruiting new distributors and from the retail sales (FTC Para. 22).  However, FTC ruled against Amway being an illegal pyramid scheme and used the case to distinguish between legal and illegal schemes (FTC Para. 21).

  1. Probably the best known example of a Mich. firm accused in the past of being an illegal pyramid scheme is Amway or Quixtar. What is the current legal interpretation and legal status of Amway? Is Amway an illegal Pyramid scheme? Explain and document the basis for your answer.

In the 1979 Amway Corporation ruling, the FTC stated that Amway is not an illegal multi-level scheme (FTC, Para, 22).  Amway involves the continuous recruit of distributors but also emphasizes on direct sale of products (FTC, Para, 23).  However, the firm was ordered to stop the act of fixing prices and misinterpreting the average distributor’s apparent success in order to lure new distributors (FTC, Para. 23).

Amway could not be classified as an illegal pyramid scheme because the firm did not charge entry fees and sale of products occurred to direct consumers rather than newer members of the scheme being forced to take the inventories (FTC, Para, 24).  Amway also allowed buyers to return excessive inventory that could not be sold, and there were bonuses for both sales of products and recruiting new distributors rather than from recruits alone (FTC, Para. 23).

  1. What percentage of Amway dealers are reported to currently earn a profit from their marketing activities? How much do they earn?

Amway dealers earn a profit from sales differences that occur between dealer and distributor, an early distributor and a recruited distributor, or a distributor and final consumer (FTC, Para. 21). About 0.5 to 30 percent of Amway dealers can profits from their marketing activities (FTC, Para. 12).  Amway dealers earn a gross income of $40 dollars a month.


  1. What was Women Empowering Women? How did it work? It has operated right in Saginaw in the past. Why do women choose STILL to invest in a “gifting clubs, such as Women Empowering Women, even though the Pyramid nature of this scandal has been well publicized

Women Empowering Women (WEW) is a fraudulent pyramid scheme that is rapidly spreading in the Western countries and targets career women (Misur, p.1). The scheme entails continual recruitment yet real investments lack.  Every woman that joins is expected to recruit between 5 and 8 more members (Misur, p.2).

Women meet on friendly occasions or unions in which gift parties are conducted where the gifts are delivered in rounds (Misur, p.1).  New recruits are invited and hand an estimate of about $ 500 to $5, 000 for registration, and securing a place at the pyramid’s bottom, but are promised that they will rise if they recruit new member (Misur, p. 1).  The new recruits should then aim for the top and earn about 24,000 euros.

Women are still lured into schemes such as the WEW because the person approaching to recruit is always a trusted friend or family member, or people of the same social circle (Misur, p.2).  Moreover, women are promised economic growth and hence a boost to the socio-economic status.  The false depict of trust shadows the judgment that the pyramid scheme could turn into a loss.

  1. b. Google to Business Week ‘Niche-Market Madoff’ to learn about a recent Ponzi scheme which was sold and promoted through the FBI, and which targeted law enforcement officers. How is it that an organization as sophisticated as the FBI could be duped into promoting a Ponzi game/investment scheme which ripped off officers of the FBI, the Drug Enforcement Agency and US Customs and Border Protection?. In fact, the FBI paid this Con artist to promote this program to federal law enforcement employees as a great retirement opportunity. How could /did this FBI-promoted Ponzi scheme succeed for so long before being discovered? Does this help to explain why Bernie Madoff was able to operate his Ponzi game so successfully, for so many years, to relatively sophisticated Investors?

McLeod, Kenneth Wayde, the 48 year old who succeeded in the recruiting officials from government agencies for investment schemes has been doing so for more than 20 years and paid $15,000 per seminar (Schmidt, Para. 3).

An organization as sophisticated as the FBI was duped into promoting a Ponzi game because McLeod intelligently established connections from federal officials; in fact, McLeod was hired by a top official in the FBI and therefore it was only easy for the rest of the officers to trust McLeod (Schmidt, Para. 7).  Just like in Madoff’s case McLeod did not promise a tremendous return in investments and he also ran the schemes legally, and this enhanced the trust and the long time survival of the scheme.

McLeod is also not discovered until he personally confesses through e-mails to his customers, leaves a suicide note and shoots himself (Schmidt, Para.66, 68). The two incidences of McLeod and Madoff simply show that the federal agencies are either incompetent or reckless in recognizing and dealing with fraudulent crimes just as Rhee (p. 365) has argued.

  1. Milton Friedman became very controversial for his position that our Social Security system is a massive government-runs-a-Ponzi game.
  2. Who was Milton Friedman? (He has since passed away!) What kind of economic credentials did he have which gave his position some credibility?

Milton Friedman (1912-2006) was an American economist whose propositions especially focused on monetary policies and economic growth (Schwartz, p.259).  Milton Friedman also won a Nobel Memorial Prize (Friedman, p.1) a credential that gave his position some credibility.

  1. Do you think Friedman was correct in his position that social security was and is a massive government-run Ponzi game? How do recent demographic changes in our population and society tend to bolster his arguments?

Friedman was correct in terming Social Security a massive government-run Ponzi game.  Just like the Ponzi game, the current tax payers pay for retirement benefits of retirees (Friedman, Para. 5).

The recent demographic changes in the population and society bolster Friedman’s arguments by showing that current younger workers are opting for individualized Social Security schemes as opposed to the government’s scheme (Friedman, Para. 4). This is because the Social Security benefit has become less attractive because the number of recipients has grown higher as compared to the workers who pay taxes and the gap in the imbalance continues to widen, as a result of increasing low socioeconomic statuses (Friedman, Para. 4).

  1. Based upon what you have learned from this assignment, do you think that social security is a viable retirement plan for your generation? What do YOU plan to do about it? Do you think you can or should rely on SS for your retirement income?

Social security is not a viable retirement plan for this generation as they are made to pay for a social scheme that may not benefit them at retirement age.  It is uncertain that the government will have enough money to sustain the pyramid when the redemption increases (Friedman, Para. 10).

The best way to go about it is encourage investment in private accounts for retirement income, such that one is assured that the earnings will be there when needed. Social Security should be made optional.

  1. What future changes can you expect for the US Social Security System? How will these likely changes affect your future life, employment and retirement plans?

The government should create a less mandatory Social Security scheme. Alternatively, retirement schemes should be exclusively dedicated to the individual and be deducted depending on the individual’s income and social status rather than a common cost for all workers, and this should be placed in an individual’s account rather than where the government uses the money to pay for a previous generation.

Such changes will ensure that one lives a comfortable life in the future.  Moreover, being in employment will be satisfactory and one is able to retire with assurance of adequate security.



Works Cited

Federal Trade Commission (FTC). Prepared statement of Debra A. valentine, General       Counsel for the U.S. FTC on Pyramid schemes, FTC, 1998

Friedman, Milton. Social Security: The biggest Ponzi scheme on earth. Hoover Digest, 1999,        Is. 2

Misur, Susan. Gift tables lure women. McClathy-Tribune Business News, 2010, March 21: 1-       2

Perkins, Edwin. Ponzi: The man and his legendary scheme. Business History Review, 2005,          vol. 79(1): 141-143

Rhee, Robert. The Madoff scandal, market regulatory failure and the business education of          lawyers. Journal of Corporation Law, 2009, vol. 35(2): 363-393

Schmidt, Robert. Niche-market Madoff duped law officers in Ponzi with a twist, Bloomberg,      2010, September 3.

Schwartz, Anna. Monetary policy and the legacy of Milton Friedman. Cato Journal, vol. 28(2): 255-262



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