Pyramid Pirates: A FOX56 Special Report
(WOLF) -- Low risk with the promise of a high return.
Pyramid and Ponzi schemes may reward those at the top with a nice payday, but those at the bottom – are often not so lucky.
FOX56’s Jade Jarvis spoke to experts about some of the trouble these schemes can cause for not only your wallet, and can also have you facing some serious charges.
New dogs, same old tricks.
You might have seen posts like this one popping up on your social media feeds lately.
One person invests $100 into a money pool and then recruits seven others to do the same.
Once the first person reaches the top, they get to “cash out” – taking their original investment and everyone else’s. That equals a payout of $800.
Then the cycle starts over again, the remaining investors encouraged to recruit more people so they can cash out too.
Its been called a “money tree” or “blessing loom”, but if you take a look at the shape of this graph, you can probably figure out another name for it.
A pyramid scheme.
“You think of a pyramid, you know its like this, and you have one main leader at the top and their job is to recruit people in the down line is what they call it. So he recruits people in the downline who pay him an entry fee if you will and then the people he recruits they have to go out and recruit people themselves to make their money back.” Chris Scalese, President of Fortune Financial Group in Dunmore, said.
Schemes like this one have been circulating on Facebook and Snapchat with friends and family members doing the recruiting.
And mobile payment services like Venmo, PayPal, and CashApp make the transition of funds seamless.
It seems like a quick, easy way to make a nice chunk of change – but only as long as recruits keep rolling in.
Scalese says mathematically – its impossible.
“Why pyramid schemes never work is because they’re bound to fail just because of the numbers that are involved. So let’s just say that every person in the down line has to recruit six other people ok, once you get down to eleven levels of that down line, that’s more people than the entire United States population as a whole so that’s just why the numbers don’t support themselves and eventually all pyramid schemes crumble,” Scalese said.
Ponzi schemes are similar to pyramid schemes.
It pays existing investors with funds collected from new investors and promises to generate high returns with little risk.
All is good when the cash flow is steady, but when it starts to fizzle out those schemes also collapse.
Another similarity between the two – they’re 100% illegal. And it could mean some serious consequences for those who become involved.
“Some of the charges would be fraud and access to vice fraud and what that is, is you’re taking people’s money and it could constitute theft. You’re not putting it towards a legitimate investment to where they can put a return on it. When you take somebody’s money and you don’t do anything with it, you just take it – that’s theft,” Tpr. Anthony Petroski said.
So what is a good investment to make?
“You know, you could invest money in legitimate investments and still lose money because the stock market does this, the stock market goes up and down so there’s not necessarily a safe way to put your money in the market, but you just have to make sure it’s a legitimate investment, that it is registered with the SEC, that its not just some fly-by-night investment that you’ve never heard of,” Scalese said.
The U.S. Securities and Exchange Commission says some of the things to look out for if you’ve been asked to participate in a new money-making or business program are:
• An emphasis on recruiting.
• A lack of genuine products or services being sold.
• “Easy money.”
• And promises of high returns in a short time period.
State Police have a few tips as well.
“First thing is don’t commit to any money. If its something you really want to look into contact a true investor, contact a bank, contact a family or friend, run it by them before you go donating any money. Again, maybe just somebody else’s perspective to look into it may make you realize this isn’t true and they are going to take my money and I’m going to be out X amount of dollars in my bank account. Have somebody else look at it and if you are a victim make sure you contact your local police so they can investigate,” Petroski said.
The Better Business Bureau has ways to protect yourself from getting caught up in pyramid schemes.
They say if it sounds like its too good to be true – it probably is, don’t always trust what your friends post because their accounts could be hacked, and if you see something suspicious on social media, report it to that website’s help link.