Pyramid schemes seem like a relic of olden days, but many are still active and seeking new victims. A company recently contacted a friend of mine and asked to join a business venture selling discount travel packages. The company uses aggressive marketing strategies to recruit new members who pay a fee to join. In exchange for payment, new recruits can sell company products and recruit additional members. The more people you sign up, the more money you make. Organizations such as this are multi-level marketing (MLM) companies. While some of these companies are legitimate, others are illegal pyramid schemes. To avoid falling victim, it’s important to be able to identify some of the common characteristics of a pyramid scheme. These include:
- Earnings based mostly based on how many people you recruit.
- Requiring a large upfront investment.
- Products have little inherent value.
Pyramid schemes are fraudulent because they engage in deceptive trade practices. Such companies frequently use misleading promotional materials to lure new members with the promise that they can “get rich quick.” Videos and brochures from these companies often include testimonials from members who’ve supposedly gotten rich with only minimal effort. As is usually the case, if something seems too good to be true, it probably is. Contrary to the glamorous promotional videos, pyramid schemes usually result in a lot of innocent people losing their money. This is because by their very structure, these organizations are unsustainable. As more members join, the pyramid structure becomes increasingly unstable. Eventually it results in a total collapse that leaves only the people near the top with their money.
What protections are available for victims of pyramid schemes?
Fortunately, there are laws in most states prohibiting pyramid schemes and other deceptive business practices, imposing stiff penalties for organizations and individuals who engage in this type of behavior. Enacted in 1969, the Colorado Consumer Protection Act (CCPA) protects Coloradans from unfair and dishonest business practices. The CCPA describes in detail a variety of such practices, including real estate fraud, telemarketing, and pyramid schemes, as well as the penalties for engaging in them. It defines a pyramid scheme as:
… any program utilizing a pyramid or chain process by which a participant in the program gives a valuable consideration in excess of fifty dollars for the opportunity or right to receive compensation or other things of value in return for inducing other persons to become participants for the purpose of gaining new participants in the program.
Can a lawyer help?
Penalties for perpetrating a pyramid scheme can be substantial. In addition to criminal prosecution, the CCPA states that violators who engage in “bad faith conduct” (i.e. purposely dishonest conduct that causes injury) may be sued for three times the damages they caused. This so-called “treble damages” clause of the CCPA provides an incentive for attorneys to go after offending individuals and companies.
The line between legal and illegal can get quite fuzzy, especially when the company in question is selling products that have an actual value. In many cases, however, the products are overpriced, and new members are required to purchase large quantities upon of joining without the option of returning unsold products. In navigating these murky legal waters, it’s best to consult an experienced consumer advocacy attorney, someone familiar with the CCPA and knows how to apply it. If you or someone you know has fallen victim to a pyramid scheme or other dishonest business practice, contact Norton Frickey, P.C. for a free consultation today.