Pyramid Schemes and Multi-Level Marketing (MLM) Companies

The originator of the pyramid scheme, Charles Ponzi, knew a good thing when he saw it. A good thing, that is, for the people at the top of the pyramid!

A pyramid scheme (also known as a Ponzi scheme) is a scam in which people pay money to join, and then receive money when they enroll others in the plan. A pyramid scheme is generally not sustainable in the long run, as an ever-increasing number of new associates are required in order for the older associates to continue to receive money.

Multi-level marketing companies are similar to pyramid schemes, but they hide behind products such as cosmetics, nutritional supplements, or household items to legitimize the schemes as real “business opportunities.” While  MLMs masquerade as legitimate businesses with quality products to retail, the truth is that nearly all of them are more appropriately termed “product-based pyramid schemes.” Representatives are brought into the schemes under the guise of purchasing products for wholesale prices and selling them at a retail markup.

Once inside the plan, associates are encouraged to heavily recruit new representatives, because that’s where the real money can be made. These companies rely upon an endless chain of recruiting in conjunction with purchases of the company’s products by the representatives. The purchases made by associates are quite often made simply for the purpose of qualifying for a commission or payout level.

The multi-level marketing business model is extremely profitable for the corporate entities, hence the motivation to use this model from the start. Unfortunately, these schemes cause millions and millions of consumers to lose billions of dollars a year.

Sequence Inc. has been engaged to examine the financial statements and supplementary information of multi-level marketing companies to determine whether any red flags of fraud are present. In addition, Sequence has examined the quality of financial statements and related filings to determine whether undisclosed issues related to income, expenses, and other financial matters may exist. Tracy has been researching pyramid schemes and multi-level marketing companies for more than ten years, analyzing the recruiting techniques, compensation plans, sales techniques, and failure rates.

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