Pyramid Schemes

Created by FindLaw's team of legal writers and editors.

People are always thinking up new ways to swindle others out of their hard-earned cash. Some of these schemes can take new and creative forms. But the pyramid scheme, which is still prevalent today, hasn't changed much in over 200 years. Although there's arguably a fine line between what we call "multi-level marketing" businesses (such as AmWay) and illegal pyramid schemes, it's an important distinction of which consumers should be aware.

How a Pyramid Scheme Works

These types of scams follow a predictable formula. Usually, one person, known as the "recruiter," will create a fraudulent business which requires others to pay a fee to join. The people he recruits to the business then recruit others to join as well, and pocket the fees (often with fees paid to the recruiter as well). This cycle of recruitment is supposed to continue indefinitely, so that everyone who joins the "business" will continue to receive the recruitment fees of the newest recruits.

The problem with successful pyramids is that, eventually, there will be no one left to join the pyramid, and those already in the scheme will lose their investment.

Examples of State Laws

Each state has its own laws addressing pyramid schemes and similar forms of marketing fraud (including Ponzi schemes). Below are a few examples:

  • Florida - Codified under Florida's Deceptive and Unfair Trade Practices Act; prohibits the use of "a chain referral sales technique to get a consumer to purchase a product or service over $100, where the consumer is promised money or commission to recruit more members."
  • Pennsylvania - Prohibited under the state's Unfair Trade Practices and Consumer Protection Law; statute defines a pyramid scheme as "any scheme, whereby a person pays money or some other financial benefit for the chance or opportunity to receive compensation, regardless of whether he also receives other rights or property."
  • Arizona - Statute defines a pyramid scheme as "any scheme, whereby a person pays money or some other financial benefit for the chance or opportunity to receive compensation, regardless of whether he also receives other rights or property."

Multi-Level Marketing Businesses: Are They Legal?

Pyramid schemes are still popular today. Many reasonable people still fall for them because they sound so similar to a type of legitimate business model called multi-level marketing (MLM). An MLM business involves a central corporation that creates a product, and then convinces other people to pay a fee in exchange for the right to sell its product. They're legal but have a few things in common with illegal schemes.

Unlike a pyramid scheme, MLM businesses make their money by selling products such as cosmetics, cooking implements, and fashion accessories; they don't rely on an unsustainable stream of new recruits to make their money. However, there are several companies that billed themselves as MSM organizations only to be investigated (and sanctioned, in some instances) by the Federal Trade Commission (FTC) for running illegal pyramid schemes.

For example, the once-popular supplement and skin care company Herbalife was ruled to be an illegal pyramid scheme by a Belgian commercial court in 2011 (however, the suit was dismissed on appeal). Shortly after the initial ruling, the FTC started investigating complaints that Herbalife deceived consumers about how much money they could potentially earn selling products. The company eventually settled for $200 million, but wasn't forced to shut down.

How Pyramid Schemes are Prosecuted

There's no single federal statute the US government can use to prosecute pyramid schemes. However, the Federal Trade Commission has occasionally prosecuted pyramid schemes as deceptive trade practices, or fraud. Additionally, each state has its own set of laws designed to combat pyramid schemes. Many require the promoters to pay fines or spend time in prison if convicted.

Charged with Running a Pyramid Scheme? Get Legal Help

If you're facing allegations of operating a pyramid scheme, you could be charged under a variety of state and federal laws. You have many important rights and constitutional protections which, if violated, could lead to a dismissal of charges or an acquittal. The most important step you can take is to contact an experienced criminal defense attorney who can start advocating for you from the very start of your case.

Next Steps

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