Following are articles, links and references pertaining to various internet fraud methods targeting consumers and the modus operandi range from clever disguises to obtrusive assertions. They use age-old tactics to prey on those who are most vulnerable; single mothers, students, etc. Members may recognize particular traits and characteristics in the programs they promote. We encourage discussion as long as it remains in keeping with educational purposes.
The author of these works has graciously allowed them to be re-published for our convenience.
| Ponzi Schemes *In turn of the century Boston, an Italian Immigrant named Carlo "Charles" Ponzi established the Securities Exchange Company. Ponzi offered investors a choice between a fifty percent return on a 45 day investment and a 100% return on a 90 day investment. Ponzi claimed that this return on investment was possible due to his unique understanding of the international postal reply coupon system; by international agreement, postal reply coupons were recognized by all countries but the cost of these coupons varied dramatically from country to country depending upon their economy. Although true in principal (an IPRC that cost a penny in Germany cost a nickel in the US), Ponzi was fully aware that the scheme did not work in actual practice because of importation restrictions. Nevertheless, the story sounded good. Investors did receive the interest on their investments that they were promised and the investments poured in. This was not a revenue generating business enterprise supported by investors; there was no underlying business whatsoever. This was an investment generating scheme that relied entirely upon today’s investors to meet the obligations due to those who had invested 45 days previously. A Ponzi scheme’s indebtedness increases as a function of geometric progression; however, the enterprise generates income so long as the pool of investment capital increases faster than the debt accrued. The reason that these schemes are illegal is that, as is the case with their pyramid cousin, they are mathematically doomed to collapse. Due to the fact that there is no source of revenue other than the investment pool used to pay debt, the “Classic Ponzi Scheme" will be immediately exposed in any audit. According to generally accepted accounting procedures (GAAP), any Ponzi scheme is insolvent from the moment of its inception and becomes increasingly insolvent each day that it is in operation. The essence of a Ponzi Scheme is investment. The Ponzi operator typically represents that he has some sort of "system" that is either incredibly complex, or a proprietary secret. His system makes it possible for him to pay incredible rates of return. The elaborate office, exquisitely tailored suits, involvement with the church, and generosity toward charitable organizations are all classic window dressing. Ponzi schemes do not decline and fall; they are typically hugely successful until they collapse. Everyone is making money, everyone who wants their money out gets paid, and everyone is happy until the regulators shut it down or something precipitates a run on the bank. In closing, I want to alert you to the fact that it may not always be clear that a debtor was in fact operating a Ponzi Scheme and I have been involved in cases where over zealous prosecutors applied this label to legitimate businessmen who became hopelessly overextended, made poor business decisions and pursued fiscal strategies that were totally unrealistic in hindsight. The reality is, in their efforts to stay afloat, people in this position often continue to borrow money, incur future obligations to meet today’s bills and use the funds invested today to satisfy today’s debts. Rather than give up, admit defeat and abandon their dreams, honest people with no intent to defraud may very well continue to borrow from Peter to pay Paul long after it should have been obvious that they were hopelessly insolvent. There is a profound difference between a desperate businessman who makes poor decisions and a Ponzi operator. A Ponzi Scheme, by definition, is a scheme and artifice to defraud that was insolvent from its inception. See Scholes v. Lehmann, 56 F.3d at 755; Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 871 (D. Utah 1987); In re Taubman, 160 B.R. 964, 978 (Bankr. S.D. Ohio 1993); Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 441 (Bankr. N.D. Ill. 1995); Emerson v. Maples (In re Mark Benskin & Co.), 161 B.R. 644, 650 (Bankr. W.D. Tenn. 1993) and Dicello v. Jenkins (In re International Loan Network, Inc.), 160 B.R. 1, 12 n.15 (Bankr. D.C. 1993) |
| Pyramid Schemes *A Pyramid Scheme is a multi-level marketing (MLM) program that cannot support itself because earning money, and/or advancing within the system depends on recruiting other people into the operation, rather than selling a product or providing a service. A person is generally (but not always) required to pay an upfront fee to participate. Note that although all Pyramid Schemes are multi-level marketing programs, all MLM programs are not necessarily Pyramid Schemes. The distinction lies in the source of revenue, and the independent viability of the underlying enterprise. The fundamental issue is, does the operation need the financial contributions of new members to survive, or can it stand on its own? As an investigator, you must be able to explain “why” this sort of scheme is not legal to laymen who may not, depending upon the complexity of the program, see the problem. You do that by using a basic illustration that anyone can understand and then applying that model to your case. The common chain letter is the most basic illustration of a Pyramid Scheme. Suppose I send you (and tens of thousands of others) a list of ten names and addresses along with a letter offering you an opportunity to realize windfall profits by sending each of the people on the list (let’s call them P1 – P10) a measly dollar each (CASH ONLY), for the privilege of participating in my “program.” I am person P10 on the list. My letter goes on to explain that you, in turn, do as I did - delete P1 from the list, move everyone else up one space and put your name in my P10 position. You then send your list out to as many as you wish, with a photocopy of the letter containing the instructions. The letter assures you that this is a real money maker, some of the people toward the top of the list have bought new houses, and one of the guys bought a Lamborghini a couple of months after he joined. Chain letters and other Pyramid Schemes typically include testimonials from fictitious people, or “shills” who brag about their experience. The encourages you to participate and describes a model where all you must do is sign on 10 people in your “downline” who each recruit ten, and so on. Here is what the letter says you will get for your $10.00 investment by the time your name falls off the list.
“Ok, any fool can see that you’ll make a profit of $1,111,111,100 if the people in your downline just manage to recruit ten people – with just a ten people turn around, the money will come pouring in and all it costs you is $10 and ten stamps. Here’s the really important part – this is all strictly legal because all I am guaranteeing is that YOU will make YOUR investment back if YOU recruit 10 people and that is all you will be guaranteeing them by giving them a copy of this letter which has been approved and endorsed by the Post Master General, the United States Attorney’s Office and Barbara Bush! Now I’m not trying to make you believe in “pie in the sky,” neither of us really believes that you are actually going to become a billionaire ten times over by investing a mere $10 – life doesn’t really work like that. The potential is there, but realistically, nobody expects to make more than a few hundred thousand and you may not even make that much. Other than the people you recruit, you are counting on other people to make you successful just as I am counting on you. On the other hand, you are in control of recovering your investment and you know you can do that right away. What have you got to lose?” As good as it sounds, here’s the hitch. While the letter keeps reminding you to think in terms of ten people, look at the big picture. It will require more than one billion people to fill the tenth tier in your pyramid and those people must lose their investment because it would take 10 billion people to fill the eleventh tier and there are not that many people on the planet. No matter how you look at it, a Pyramid Scheme is a fraud on somebody. It has to be, since the system relies upon the distribution of a valuable consideration, ongoing distribution requires a rapidly growing list of participants and nothing of value is created anywhere in the process. That is the key to identifying a Pyramid Scheme – does the system’s growth, prosperity and survival depend upon the value it creates, or is the value contributed by today’s recruits distributed to pay those who were recruited yesterday? Participants in “chain letters” are aware of their role in the scheme. It is obvious to anyone that there is no underlying product, today's investors pay for their place on the pyramid and then solicit tomorrow's investors. Each becomes the head of their own personal pyramid, thereby exposing themselves to criminal culpability and civil penalty. Investigation often reveals that the first ten names on the list are aliases used by the same person who controls the post office boxes or mail drops where the money is to be sent. That individual sends the list and accompanying letter to thousands of recipients. Unlike checks, a dollar bill sent to “Joe Schmoe” has cash value to whomever actually controls the box. Pyramid promoters do not usually limit themselves to soliciting dollar bills. A look at Prosper International League's Galaxy Plan, as it was formerly hyped on the Internet, is a classic example of a “bare bones” Pyramid Scheme that required a significant investment to participate. As a consequence of our investigation, the various web sites that promoted this scheme are inactive, but a “Google” search will enable you to view cached pages. As previously stated, the chain letter serves as the basic Pyramid Scheme model for purposes of illustration. Most Pyramid Schemes are substantially more complex, in that they are constructed to look like a multi-level marketing (MLM) operation such as Amway, where people buy in, and then benefit from their product sales and the sales of those that they recruit into the operation. In these cases, the only people who realize that the operation is a scam are those at the top of the pyramid; the other investors believe that they are involved in some sort of legitimate MLM enterprise. A scam of this nature rocked the state of Kansas in the mid 1980's. In this scam, Activator Supply Company sold ''activator kits'' to investors that would allow them to grow milk-based bacteria cultures for resale to “Culture Farms” who, according to the marketing hype, processed them and sold them to “Cleopatra's Secret” who used them to make cosmetics. This was a dream come true for anyone wanting to make a good living from home, everyone who joined was paid as promised and every single mom in Kansas frantically worked, borrowed or begged to raise the money necessary to buy the “activator kit” necessary to join the program. It was a real moneymaker until regulators shut them down. Investigators determined that the program was a hoax - there was no existing market for the cultures that these home based entrepreneurs were growing. The companies involved were empty shells and no cosmetics were actually produced. The system was set up like a circle where the “cultures” the people grew and sent to “Culture Farms” were returned to the Activator Supply, Co. to be resold as “activator kits.” The people who invested had no idea – although they were making money, and lots of it, they had no way to know that the money they made was taken directly from the investments of subsequent investors. This case is a classic example in which the entire scheme is exposed when you peek behind the curtain. If you visualize how this system worked, you will understand Pyramid Schemes. Although it is often asserted that the social security program is a classic example of a Pyramid Scheme, this is not the case. People do not buy into the SS program believing that they can entice their friends to join and realize a major return on their investment and, unlike the classic pyramid, the SS program is not necessarily doomed to collapse since the government requires participation and the government can subsidize it as necessary. |
| Ponzi v. Pyramid; A comparison *The words “Ponzi” and “Pyramid” are often used interchangeably but, as evidenced by the examples provided, they are different – the principal difference being that a Ponzi scheme has only one “official” promoter. Otherwise, they have much in common. Both are fraudulent “investment schemes” promising unrealistic returns on investment capital, both typically encourage investors to reinvest their profits, both depend upon new investors to satisfy their obligations to prior investors, both are continually insolvent and both are against the law. Ponzi Schemes invariably involve a material misrepresentation as to the nature of the investment, but a Pyramid Scheme may not. Those who invested their money with Ponzi Scheme operators like C. Philip Elliot, David Mobley and Charles Ponzi, or Pyramid Scheme promoters like Activator Supply Company, fully believed that these fraudulent promoters had discovered or developed a “system” for making money that generated extraordinary returns on investment. On the other hand, those who invested in Pyramid Schemes like “chain letters” and the previously referenced Galaxy Program promoted by Prosper International League, Ltd., knew that their profits were derived solely from contributions of subsequent investors. The victims of a Ponzi Scheme are innocent victims, but the victims of Pyramid Schemes victimize others in that they directly promote the criminal enterprise. They may, or may not, be criminally culpable and/or civilly liable, depending upon their understanding of the system. Those who legitimately believe in an underlying structure that serves to create something of value to consumers (like Activator Supply) are innocent victims, but those who promote programs like chain letters and the Galaxy Program are perpetrating and promoting a crime. |
*Articles reprinted in entirety by permission.
Source: http://www.fraudsandscams.com/index.shtml
Additionally, the U.S. Department of the Treasury - Bureau of the Public Debt and the U.S. Securities and Exchange Commission explain in detail how illegal High Yield Investment Programs or (HYIPs) operate.
http://www.publicdebt.treas.gov/cc/ccphony9.htm#Definition
http://www.sec.gov/divisions/enforce/primebank/howtheywork.shtml
There should be no confusion about the fact that many members, investors and promoters are all taking part in perpetuating these crimes. In most cases, ignorance and denial of the law cannot be used as a defense since the member/investor did not exercise due diligence prior to the transaction which would have revealed the illegitimacy of the program.
It should also be noted that Randomizers, Bubble Games, Gifting Clubs, some Multi-Level-Marketing Schemes and many Auto-surfs are also categorized as fraudulent. You can help by educating yourselves and each other in order to reduce the likelihood of falling victim to internet cons, schemes and scams.
No comments:
Post a Comment