Pyramid Schemes
What are they?
Pyramid schemes are illegal money making operations. Profits gained from pyramid
schemes are based on the necessity of recruiting new members to contribute to the
person at the top of the pyramid. The new members who contribute hope that one day
they will be at the top of the pyramid to receive their profits.
Why is it illegal?
The reason pyramid schemes are illegal is that it is a mathematical certainty
that the last people to enter the scheme will lose money. This means that there
will always be victims. Also unlike gambling there is little or no opportunity for
the state to regulate the procedures by which pyramid schemes operate. The circumstances
under which pyramid schemes operate create opportunities for deception and fraud,
and are common occurrences in pyramid schemes.
Penalties
Each act of promoting, operating, advertising, or establishing a pyramid
scheme is a violation of the Pyramid Promotional Schemes Act Section 57-13-1 NMSA
1978. It is punishable by a basic sentence of 18 months in the penitentiary and/or
a fine of $10,000.00. It is classified as a fourth degree felony.
How to tell if it is illegal
Pyramid Schemes are broken into two categories; product based schemes and
non-product based schemes. Non-product based schemes are easier to identify and
have been the subject of much activity in New Mexico. A non-product Pyramid Scheme
is an illegal money making scheme whereby persons participating in the scheme contribute
only money to a person identified at the top of the pyramid. These types of schemes
have gone by various names in New Mexico including Women Helping Women, The Dinner
Party, and La Familia Grande.
In non-product based schemes the question that should be asked is: If no new members
join can I receive any profits? If the answer to that question is no then it is
illegal. In illegal schemes it is a certainty that at some point in time no new
members will join. In an illegal pyramid scheme if everyone on earth (six billion
people) participated in a one-time pyramid scheme, approximately five billion would
lose their money. In other words there are guaranteed victims. That is what makes
the schemes illegal.
Product-based pyramid schemes are where participating persons not only contribute
money to a person identified at the top of the pyramid but also are encouraged to
sell a product associated with the person at the top of the scheme. These product
based pyramid schemes are often disguised as “business opportunities.”
Product-based schemes are harder to detect. The detection and evaluation of these
schemes can be a complex process. Persons wanting to learn more about product-based
schemes are encouraged to access web site
www.PyramidSchemeAlert.org.
This web site contains a twelve-question formula to help answer questions regarding
participation in product based pyramid schemes. In addition an excellent reference
book is Pyramid Nation, The Growth Acceptance and Legalization of Pyramid
Schemes in America, by Robert Fitzpatrick, FitzPatrick Management
Inc. Charlotte, North Carolina.
Terminology
Illegal pyramid schemes typically use terminology to convince new recruits
that this particular scheme is legal and can therefore be distinguished from other
illegal pyramid schemes. This is false. For example, instead of using the word
contribution to describe the money the new recruit gives to the
person at the top of the pyramid, the word gift is used. This choice of
words does not in any way legalize the activity. Similarly, instead of using the
word recruit, the word invite is used: instead of using the word
pyramid, the word circle is used. This use of terminology to convince
new recruits is a common ploy and should warn the listener that the scheme they
are hearing about is illegal.