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A pyramid scheme is a common scam,[note 1] also known as an endless chain because it recruits members in, well, an endless chain. Suckers pay in, on the promise they'll be paid a cut of the return from their recruits, their recruits' recruits, and so on. Membership grows exponentially (hence the pyramid shape), and recruiting quickly becomes impossible; when the scheme collapses as a result, those at the top of the pyramid[note 2] have siphoned all the money from everyone else at the bottom.
The endless chain scam is at least a century old, but the Internet is what's really ushered in its golden age. That's because it spreads virally, which is why it can be considered a form of affinity fraud. The most basic pyramid schemes are naked get-rich-quick scams which don't even pretend to offer any service or product; these are illegal in most countries. Some pyramid schemes add product sales to skirt those laws, and operate (quasi-)legally.
Pyramid schemes can grow to hundreds of thousands of victims, who lose millions. Losses are often compounded by borrowing from credit cards or against collateral. Visible minorities and the poor are often targeted. In Albania, they nearly caused a civil war.
Do the math
The classic pyramid scheme is sometimes known as the eight-ball model, and it still pops up frequently under the names "birthday party," "gifting circle," "cash club," and "airplane game", among others. In an eight-ball scam, seven scammers form the first three layers and solicit a sum of money from eight suckers, which is paid to the scammer at the top of the pyramid. The top of the pyramid leaves, the pyramid divides in two, and the cycle repeats with each scammer/sucker advanced one level up the pyramid.
It doesn't take a Ph.D. in mathematics to see that the bottom 3 levels of the pyramid always lose money. At just ten levels deep, that's 894 people — a loss rate of more than 87%. With just one additional recruit per level, that loss rate climbs to more than 96%, and with more than three recruits loss rates are practically indistinguishable from 100%. You also don't have to be a math genius to see that even with just two recruits per level, the simplest possible pyramid scheme, after not even 30 iterations the number of total suckers exceeds the population of Earth. And that's assuming that every man, woman and child on the planet wants to sign up — the scheme obviously runs out of people willing to join well before that.
cocaine-fueled well-paid social circles, this game is played for "fun" – as long as a group keeps playing, the money just changes hands between them. The "excitement" comes partly from the ever-present risk that one will lose a couple thousand dollars if people stop playing.
The endless chain's enduring popularity is partly due to its adaptability.
Pyramid schemes are similar to Ponzi schemes, so much that the two phrases are used interchangeably. In both schemes, early investors are paid using the investments of later investors. The main difference between a pyramid scheme and a Ponzi scheme is that in a pyramid scheme, money passes from one level to another, while in a Ponzi scheme, all of the money goes through the scammer. While early investors in a Ponzi scheme will profit at the expense of later joiners (assuming they aren't, as often happens, suckered into rolling their money into further "investments"), they aren't directly taking money from the later joiners.
In a pyramid scheme, however, early joiners act as both victims and perpetrators. Since Ponzi schemes have an intermediary between participants, their nature tends to be less transparent. With a pyramid scheme, participants often don't bother questioning where the money is ultimately coming from, but it is clear to anyone who bothers to seriously examine the system that there is no source of funds external to the participants. The scammer in a Ponzi scheme, on the other hand, usually presents some purported external source of money, typically some complicated financial strategy. Depending on the scheme, the explanation can vary wildly in both specificity and plausibility, although it is almost always sufficiently lacking in both that it does not stand up to careful examination.
Matrix sales, also known as ladder schemes, are websites where you purchase an item, typically of little value, in order to be added to a waitlist for a product of much higher value. To win the prize, an endless chain of new purchasers must sign up, and most people who sign up (>90%) lose. Matrix schemes are an attempt to skirt laws prohibiting franchise fraud by ostensibly offering a product for sale. This scam emerged in the early 2000s and was very popular in the UK before it was banned in 2005. Matrix schemes are also in legal limbo in the US and payment processors have mostly blocked them.
Like matrix schemes, Multilevel marketing (MLM) companies, of which Amway, Shaklee, and Herbalife are among the best known, are legally distinguished from illegal pyramid schemes because they sell products, and income is (supposedly) derived primarily from sales of those products to outside parties. However, for most, income derived from selling products is dwarfed by income derived from recruiting new members who are obliged to buy stock or franchise rights or make some some of initial investment, making the distinction slight in a practical sense (but not in the legal sense).
Some pyramid schemes will try to pass themselves off as multilevel marketing, with the "product" being sold mainly consisting of information, or mainly sold only to new people recruited into the business. In practice, the legal distinction between the two is often a fuzzy one. For these reasons many people charge that MLMs are nothing more than legalized pyramid schemes.
Because pyramid schemes rely on social contacts, religious affiliations can be a particularly useful structure for creating the pyramid. Religious people already have faith in a religion, so why not exploit it for faith in the scheme? John 1:35-46 has been called the original pyramid scheme by one Christian leader (although this comparison is admittedly tenuous as the passage in question does not involve any actual money or products changing hands, merely the recruitment of converts, which pretty much every religion except Zoroastrianism and the religion of the Yazidi engages in). In Papua New Guinea, the most notorious pyramid scheme, known as "U-Vistract", was organized as form of Christian mission. Religious pyramid schemes are not restricted to Christians. In 2010 an Islamic, "sharia compliant" ponzi scheme was broken up for defrauding investors of US$43 million. Another pyramid scheme targeted Orthodox Jews in the US. Buddhists have also been targeted in ponzi schemes.
Put on the pyramid-shaped tinfoil hat
Pyramid scheme promoters frequently also promote pseudolaw, pseudoscience, and quack health nostrums. Pyramid schemes have existed involving the sale of everything from pseudo-legal training in debt elimination and "sovereign citizenship" scams, to non-working devices purported to run your car on water, to ineffective improve-your-eyesight exercises.
Argumentum ad pyramidem
A common fallacy among pushers of doomsday scenario paranoia and rugged individualism is the denigration of systems designed to operate with little or no assets on hand as pyramid schemes. The flaws in this comparison obvious to anyone who knows what a pyramid scheme is and why they're illegal in basically every jurisdiction worldwide, are that a pyramid scheme must expand in size in order to avoid collapse, and that they exist purely to concentrate funds from new inductees into the pockets of their recruiters.
In contrast, typical targets of this slander (Social Security, fractional-reserve banking, fiat currency...) are sustainable in perpetuity (or, in the case of Social Security, can be if the government would just collectively pull their heads out of their asses and do the unpopular but essential job of
adjusting the age raising the payroll tax cap), and act only to protect or enhance the financial status of all participants.
How to spot a pyramid scheme
- Multilevel Marketing: Last Week Tonight with John Oliver
- See the Wikipedia article on List of Ponzi schemes.
- Or it can mean the schematics for, and/or the process of building, the pyramids built in Egypt.
- Typically 5-10% make any money in smaller regional scams. Often that number is less than 1% in larger scams and in MLM.
- California Penal Code §327, Hawaii Revised Statutes § 480-3.3, Wisconsin Statutes § 945.12 (2013)
- Skarda, Erin. "William Miller, the Original Schemer". Time.
- "Pyramid schemes cause huge social harm in China". The Economist.
- Christopher Jarvis, The Rise and Fall of Albania's Pyramid Schemes, Finance & Development: A Quarterly Magazine of the IMF, March 2000.
- "Pyramid Scheme Scammed Women". CBS News.
- ABC7: Gifting Scams
- "Matrix Website Scheme stopped by Office of Fair Trading". Archived from the original on 14 March 2007. Retrieved 5 August 2006.
- Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0471272426.
- Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0470387963.
- Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19.
- Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. 2. Sage Publishing. p. 880. ISBN 0761930043.
- Did Jesus Invent the Pyramid Scheme? by Stephanie Remington (June 20, 2018) Lewis Center for Church Leadership.
- Fast Money Schemes: Hope and Deception in Papua New Guinea by John Cox (2018) Indiana University Press.
- Feds: Ponzi Scheme Lured Investors With Islamic Law (November 17, 2010 at 10:26 am) CBS Chicago.
- Investors 'stuck' high and dry in WexTrust fraud case by Tom Shean (Oct 23, 2008) The Viriginia-Pilot.
- Buddhist Ponzi Scam Alleged in Los Angeles by Tim Hull (July 24, 2009) Courthouse News.
- US Department of Justice: Wethersfield Woman Pleads Guilty to Money Laundering Offense
- "‘SOVEREIGN CITIZENS’ INDICTED IN TUCSON". Retrieved 5 April 2018.