When Pyramids Collapse
Pyramid schemes, ponzi schemes, and other types of scams have taken in many suckers over the years. Are you one of those suckers?
Today in Tedium: It's the oldest scam in the book, and people fall for it all the freaking time. Pyramid schemes of all shapes and sizes have been bilking people out of their hard-earned money for generations, and you're probably gonna get screwed out of your hard-earned money before you even realize it. Today's Tedium is all about scams that leave scars way deeper than all the money stolen. — Ernie @ Tedium
If I run into Dave Rhodes on the street, I'm gonna punch him in the face
Usenet was a weird place even when it was popular. The massive open forum was culturally fascinating and a little dangerous—like walking down the street in an up-and-coming neighborhood that hadn't yet found its identity. You were excited to be a part of the scene, even as you were worried you might be walking down a dark alley without realizing it.
On the plus side, the dark alleys were pretty easy to spot, because they led to people like "Dave Rhodes."
Rhodes was the name often used on a common piece of spam that was popular on Usenet in the late 1980s. Rhodes was commonly portrayed as a typically broke ne'er-do-well who had finally struck gold.
His trick? He had figured out how to turn the chain letter into a magical digital tool:
"In October 1988, I received a letter in the mail telling me how I could earn $50,000 dollars or more whenever I wanted. I was naturally very skeptical and threw the letter on the desk next to my computer. It's funny though, when you are desperate, backed into a corner, your mind does crazy things. I spent a frustating day looking through the want ads for a job with a future. The pickings were sparse at best. That night I tried to unwind by booting up my computer and calling several bulletin boards. I read several of the message posts and than glanced at the letter next to the computer. All at once it came to me, I now had the key to my dreams."
Before there were Nigerian scammers, Dave Rhodes—a guy who probably isn't real, even though he has an alleged backstory—was the closest thing to a Nigerian scammer one could find.
The Guardian once went on a hunt for the dude, but even they came up short. Perhaps, like most of Usenet and the money that was mailed to Dave Rhodes, he's better off left to history.
1.9M
The number of people that were affected by a pyramid scheme called TelexFree, which mostly scammed people in Brazil. The scheme, which took in more than $1 billion in a 16-month period, became one of the biggest search terms in the South American nation during 2013.
Five types of schemes that you've probably already fallen for
- Pyramid schemes: Ever hear of the term "pay it forward"? Pyramid schemes are basically the opposite—you're really paying it back. As in, people who are newer to a pyramid scheme pay back the people up top. It sounds like a good idea until you realize that you've basically built this giant pyramid on a weak foundation—one that's bound to break when everyone gets smart to the way chain letters work.
- Ponzi schemes: Much like pyramid schemes, Ponzi schemes rely on the people below them to pay for folks at higher levels. However, there are two big differences—there's usually one central point of failure, and people who invest in Ponzi schemes keep investing out of a desire to get stronger returns. This big difference is why Bernie Madoff was building a Ponzi scheme, not a pyramid scheme.
- Advance fee fraud: If someone asks you to send them a little bit of money so they can eventually pay you a lot of money, you probably should delete that Nigerian guy's email and pretend you never got it in the first place. As Priceonomics notes, the scam predates the internet by hundreds of years.
- Telemarketing fraud: If you get a phone call from "Rachel From Cardholder Services," hang up and consider destroying your phone. The infamous robocaller trying to offer you a drop in your credit card interest rate something she can't legally offer you—and you'd be smart not to listen.
- Timeshares: That vacation home in a nice area might seem like a good investment, but it probably isn't. The reason? Welp, they're designed to do two things: Nickel and dime the hell out of owners, and be useless for reselling because there are so many around. Let the FTC set you straight here.
"When you shine sunlight on Madoff it makes it difficult for Madoff to find victims. The same thing is happening at Herbalife."
— Activist investor Bill Ackman, speaking to CNBC back in Januaryabout his years-long bet against Herbalife, a nutritional supplements company which he has long claimed is a pyramid scheme. Ackman has for years shorted the company with an investment of more than $1 billion dollars, meaning that if Herbalife's massive network of goes belly up, he'll be there to pick up the pieces. Herbalife, which has more than 2.6 million active sellers worldwide, has been so consistently attacked by Ackman that they launched an anti-Ackman site earlier this month. Problem is, Ackman launched a site of his own years ago—complete with a graphic that looks like a pyramid.
The 2012 presidential candidate that helped multi-level marketing run wild all over Utah
Jon Huntsman was a well-regarded governor, and he was the rare Republican who ran for president during the 2012 election that some Democrats could see themselves embracing. He didn't gain any momentum in his presidential run, but he didn't completely embarrass himself either, so points for Jon.
The former Utah governor and onetime Chinese ambassador definitely spent a lot of time talking up his business credentials. But the problem isn't the support of businesses, but the type of businesses he backed.
That's right, guys, Huntsman signed legislation effectively making multi-level marketing legal in Utah.
"The prior law had defined a pyramid scheme as, among other things, a business where people involved derive their compensation primarily from recruiting people into the sales scheme, rather than from retail sales themselves," Mother Jones writer Stephanie Mencimerexplained in 2011. "But with a few small wording changes to the law in 2006, now as long as a Utah company's salespeople sell something like noni juice or acai berry supplements—to anyone, regardless of whether they are simply other salespeople roped into the scheme—they can't be prosecuted or sued for running a pyramid scheme."
Now, companies such as Usana and Nu Skin can operate out of the state relatively unscathed, building influence along the way. (A similar business model, the telemarketing-based “online business opportunity,” has also gained a degree of success thanks to some smart lobbying.)
Huntsman seems like a nice enough guy, but something tells us that we were better off getting someone else as president in 2012.
Now, multi-level marketing schemes like those we covered above are often bad news for the people directly affected by the scheme. The main reason for that? Generally, when the scheme is caught, there's little to no money left, because all the ill-gotten goods have gone to other people in the scheme, with people near the top getting the most.
An example of this is what happened with Fortune Hi-Tech Marketing, a company that opened its doors in 2001 and evolved into an elaborate multi-level marketing scheme—one that lured in more people through a bunch of indecipherable jargon.
After the Federal Trade Commission shut the scheme down, here's what they found left in the company's coffers:
To settle the case, the defendants have agreed to a lifetime ban from multilevel marketing. The stipulated order imposes a judgment of more than $169 million, which will be partially suspended when they surrender certain assets with an estimated value of at least $7.75 million, including property from the estate of defendant Paul Orberson, who died while the case was pending. What kind of valuables are we talking about? A farm in Kentucky, a Florida condo, a house in South Carolina, a BMW, a Jeep, two boats, a sports memorabilia collection, coins, and bullion. The jet skis? They’re going, too.
So, the 350,000 people who signed up for the multi-level marketing scheme, in hopes of fortune? They'll be lucky to get back a nickel on the dollar.