Florida Consumer E-Newsletter
October 2009
Charles H. Bronson
Commissioner
A Message from the Commissioner
Dear Friends:
The high profile arrests of Bernard Madoff and Allen Stanford this past year have left most Americans shocked and appalled. While Mr. Madoff has been sentenced to the maximum 150 years in federal prison for executing a $50 billion Ponzi scheme, Mr. Stanford awaits trial on an alleged $7 billion scam of his own. Although Ponzi schemes and pyramid schemes are closely related, both are actually older forms of fraud that have recently become more prevalent. This can largely be attributed to the fact that modern technology allows perpetrators the ability to maximize their access to potential recruits.
The Florida Department of Agriculture and Consumer Services is here for you – visit our website at www.800helpfla.com if you would like additional information, or call our Consumer Assistance Center. They will answer almost any question you may have or direct you to the best resource for assistance. If you are calling within Florida simply dial 1-800-HELP-FLA (435-7352), outside of Florida 850-488-2221, or in Spanish 1-800-FL-AYUDA (352-9832).
Sincerely,
Pyramid schemes, Ponzi schemes, and multilevel marketing plans are remarkably similar - they all promise large profits and involve the recruitment of new “members,” but only multilevel marketing plans are lawful and permissible. Understanding and recognizing the differences between the three is imperative for those investors who are truly interested in making money legally.
- Multi-level or Network Marketing Plans are a popular and legal way of retailing. For many, this is an opportunity to start their own business with a much smaller capital outlay than they might otherwise be required to make. The plan involves the sale of consumer products -- not in stores by sales clerks – but usually in customers' homes by independent businessmen and women called distributors. As a distributor, you can set your own hours and earn money by selling consumer products supplied by an established company. You can also build and manage your own sales force by recruiting, motivating, supplying, and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earnings on your own sales to retail customers. The key is that success is not dependent on the continuous recruitment of new members/distributors.
- Pyramid Schemes combine a fake, yet seemingly credible, business with a simple to understand yet sophisticated sounding money-making formula. The idea is that you make only one payment, but are promised exponential benefits once you expand your business by recruiting new members. You will receive a portion of the initial payment from each person that you entice into joining the organization, as well as a cut of the initial payment for each person that they recruit to join, and so on down the line. Although products are sometimes sold as part of the business plan, the organization is almost always an illegal pyramid scheme if the profits you receive are based primarily on recruiting others to join the operation, as opposed to a real investment or sale of goods to the public. The operation may also be determined to be an illegal pyramid scheme if new recruits are required to purchase more product than they are likely to sell and no inventory buy-back policy is in place. This scheme will only last as long as new members are able to be recruited into the organization and only a select few will see any profit at all.
- Ponzi Schemes are fraudulent investment operations whereby the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In order to continually attract new investors, the typical returns offered are abnormally higher or unusually more consistent than other investments can guarantee. The promoter has no product to sell and pays no commission to investors who recruit new members. Any returns that are paid out will actually come from that investor’s own money, or from money paid in by new investors. The scheme will continue as long as current investors keep reinvesting the profits they think they're actually earning (so the scammer never has to pay out), or if new investors continue to be attracted by the illusion of what they think others are earning.
Using a little common sense will go a long way in protecting you as a consumer. Don’t be duped by promises of high returns or enormous earnings potentials. Vague, unsubstantiated statements about the financial performance of a business or its actual investment strategy should be considered red flags. Beware of shills – “decoy” references paid by a promoter to lie about the earnings that they’ve experienced. Avoid being pressured to sign a contract or pay any money until you have thoroughly researched the company, the plan and the people involved.
You can research a company’s complaint history or report potentially fraudulent and deceptive business practices by contacting the Florida Department of Agriculture and Consumer Services at 1-800-HELP-FLA (435-7352). Remember, even with legitimate multi-level/network marketing plans, as a distributor, you are legally responsible for claims you make about the company, its product or any earnings potential for new distributors. Just because you’re repeating claims you read in a company brochure or advertising flyer does not mean you won’t be held liable.
Additional Resources
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The links below are for your information only. The goal of the Division of Consumer Services is to provide additional information to consumers. The Florida Department of Agriculture and Consumer Services does not review or confirm these sites for accuracy.
Federal Trade Commission
Multilevel or “network” marketing plans are ways to sell goods or services through distributors. Typically, these plans promise that if you sign up as a distributor, you’ll get commissions not only from the sales you make, but also from the sales of the people you recruit to become distributors. These recruits sometimes are called your “downline.”
Securities and Exchange Commission
Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s.
