(c) Don Bayley

Thinking outside the pyramid

Simple rules of thumb to avoid being ensnared by a pyramid scheme

October 17, 2014 2:00AM ET

In the light of Al Jazeera America’s multipart investigation into multi-level marketing companies, what advice would a white-collar criminologist and former financial regulator like me give to consumers to avoid being ensnared? The good news, dear reader, is that you likely already know the two common-sense truths that can protect you and your loved ones from such schemes.

Rule No. 1: If it sounds too good to be true, run — don’t walk — away. The word you want to use if your friends, co-workers or loved ones propose such a business opportunity to you is “no.”  End the conversation immediately and get away from the person making the pitch. Don’t say, “I’ll think about it,” because that will encourage them to try to wear you down.

Rule No. 2: You don’t need to know or prove that the proposal is a fraud to have reason to reject it. Leave it to the courts to determine fraud. You simply have to know that it is your money and that there needs to be a compelling reason for you to give your money to someone as part of a business deal. If a person pitches you about a “sure thing” that is supposed to pay you a big profit, you know that he or she is lying to you. You don’t have to prove to anyone that the proposed deal is a scam. Anything that sets off even the tiniest warning bells is a perfect reason to invoke Rule No. 1 and say no.

There are all kinds of multilevel investment programs that may be legal (or too difficult to prove to be criminal schemes). The law cannot effectively protect you from such schemes, but you can protect yourself if you look for these warning signs and if you follow Rule No. 1 if any of them are present.  

You do not need special expertise to distinguish between a real franchise and a back-of-the-van sales operation that can achieve a big score only by bringing in many new ‘investors.’

Any “investment” program that requires you to recruit other “investors” in order to be successful is a form of pyramid scheme. Whether the scheme meets the legal test for fraud need not concern you. That’s what Rule No. 2 is all about. You should never agree to “invest” in such a scheme. I stress the word “never.”

A pyramid scheme will typically also require you to purchase products from the company. There are, of course, legitimate franchise agreements — think McDonald’s — in which the owner of the local franchise must purchase products from the parent company. So this feature, in itself, is not a foolproof warning sign. But you do not need specialized expertise to distinguish between a real franchise like McDonald’s with brick-and-mortar stores and a back-of-the-van sales operation that can achieve a big score only by bringing many new “investors.”

To be sure, it is possible for some people to make money in a pyramid scheme. If you are one of the earliest “investors” and if you are very good at recruiting large numbers of people to become subinvestors, you may be able to make money. Nevertheless, you should ask yourself two sets of questions about this potential way to make money: 

Do you want to be the kind of person who recruits friends and relatives to get involved in a pyramid scheme in which they face a serious risk of losing their “investment” and their savings? Is that the kind of person you want to be? If so, you are the problem, and you don’t need to read the rest of this article.

How do you know that you really are one of the first investors and that you will be the kind of person who can successfully set aside moral concerns for the large number of others you will have to recruit to join the pyramid structure at a point where they face a much greater risk of loss?

If you are the kind of person whom people trust — a vital job skill for bringing many new “investors” into a pyramid scheme — you don’t need the pyramid scheme to make money; there are plenty of businesses in which you can succeed. You’ll make more money, you’ll feel better about yourself, you won’t hurt anyone close to you, and those who love you will be proud of you. Friends and loved ones won’t flee the room whenever you enter because they fear that you are, yet again, going to try to recruit them as “investors.” When people follow Rule No. 1 because you enter the room, it is long past time to think outside the pyramid and pursue better options.

William K. Black is an associate professor of economics and law at the University of Missouri at Kansas City and a distinguished scholar for financial regulation at the University of Minnesota Law School.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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