Ponzi Schemes, Pyramid Schemes and MLM Scams. Are these businesses legitimate: Xango, Prepaid Legal, Quixtar?

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Another AHBBO Article
A Pyramid By Any Other Name Will Still Come Tumbling Down

"Three Days, Three People, Retire in 30 days!

Make no mistake, People will start BEGGING you to sponsor
them in!

Take a look at this Income Projection Chart:

Level | # of Days | # Benefactored | Income Projection
1                3                    3                           $70
2                6                    9                          $130
3                9                   27                          $290
4               12                   81                         $660
5               15                  243                       $1520
6               18                  729                       $3520
7               21                 2,187                      $8160
8               24                 6,561                    $18,880
9               27                19,683                    $43,520
10             30                 59,049                   $99,840
11             33                177,147                 $227,840
12             36                531,441                 $517,120
13             39               1,594,323             $1,167,360

Days add up in a hurry and so does your downline!"

OK people ... I know how tempting this looks but REALITY check
time.  This is but one example of a number of "wealth generation
programs" currently being touted online.  The idea is that you
must find three people who want to join this program, you pay
$20 to "benefactor" each of them into the program (for a total
"investment" of $60) and you're set for life.  Oh, and you have
to do it in three days.  Each of your three, if they are to remain
in the game and thereby derive the same wondrous riches from
the program as you, must also find three people, benefactor
them into the program (again within three days) and their
three must find their three in three days and so on.

And, because non-performers are booted from the program,
so the theory goes, the only people getting paid are the
ones actively benefactoring in their own recruits, each of
whom down the line contributes their "investment" of $60.


The product each person gets for their $60 (because this is
NOT, of course, a PYRAMID SCHEME - banish the thought!) is:

"Software entitled "Building an MLM Empire using the Internet",
in which you Own Full Licensed Retail Rights to Market the
software. Retail Value $29.95 All Sales Are Final-No Refunds!"

OK, three points on the "product". 

First, your investment is $60.  The product is worth (let's give
them the benefit of the doubt) $29.95.  HELLO!?   But you get
RESELL RIGHTS!, I hear you protest.  That makes it more
valuable than just the purchase price of the product itself.  Oh
yeah?  Well, you HAVE to be able to sell the product otherwise
the whole scheme ... er ... program would be nothing more than
a wealth distribution arrangement wouldn't it?  And that's
against the law, and we couldn't have that.

Second, this is not "software", it's an e-Book. 

Third, the title of the e-Book deviously and insidiously implies
a relationship between this "wealth creation program" and MLM
(multi-level marketing).  MLM is a different thing altogether. 
For a more detailed explanation of what MLM is and what it is
not, read "Not MLM! ...  Why ever not?" at


OK, so what about these "wealth creation programs" then? 
Sounds like a great idea, right?  Everybody wins!  Well, think
about this ... if everyone goes out and gets three people who
each have to throw $60 into the pot for their three, everybody
up and down the line has effectively contributed $60 and that's
all there is in the pot.  How do you get more than your $60

Ahah! you cleverly point out, those who don't recruit ... er ...
"benefactor in" ... er ... SELL (yeah, that's it, SELL) the "product"
to their three gets dropped, don't they, so now the $20 their
benefactor contributed for them to join the program is still in the
pot but they're not.  They've forfeited their investment.  THAT'S
how we make money. 

OK!  Very good.  I can see you're paying attention.

Just one, teensy little problem with this brilliant plan. 

It's B.S..  It's a pyramid scheme and it's ILLEGAL.


In her prepared statement to the International Monetary Fund's
seminar on "Current Legal Issues Affecting Central Banks" in
May 1998, Debra Valentine, General Counsel for the U.S. Federal
Trade Commission, had this to say about pyramid schemes:

"What is striking about these schemes is that while they are
very old forms of fraud, modern technology has vastly
multiplied their potential for harming our citizens.  The Internet
in particular offers pyramid builders a multi-lane highway to
world-wide recruits in virtually no time.

"What is a Pyramid Scheme and What is Legitimate Marketing?

"Pyramid Schemes now come in so many forms that they may
be difficult to recognize immediately.  However, they all share
one overriding characteristic.  They promise consumers or
investors large profits based primarily on recruiting others to
join their program, not based on profits from any real
investment or real sale of goods to the public.  Some schemes
may purport to sell a product, but they often simply use the
product to hide their pyramid structure.  There are two tell-
tale signs that a product is simply being used to disguise a
pyramid scheme: inventory loading [recruits are forced to buy
more product than they could possibly sell] and a lack of
retail sales [sales are made only between people inside the
pyramid, not to the public in general - sound familiar?]. ...

"[P]yramids are quite seductive because they may be able to
deliver a high rate of return to a few early investors for a
short period of time.  Yet, .. pyramid .. schemes are illegal
because they inevitably must fall apart.  No program can
recruit new members forever.  Every pyramid .. scheme
collapses because it cannot expand beyond the size of the
earth's population.  [Footnote 3: "Assume a pyramid scheme
in which each person recruits 10 new people.  There would
be one person at the top, 10 beneath her, 100 beneath them
and so forth.  The pyramid would involve everyone on earth in
just 10 layers of people with one con artist on top.  The
bottom layer would have more than 4.5 billion people."]
When the scheme collapses, most investors find themselves
at the bottom, unable to recoup their losses.

"Some people confuse pyramid .. schemes with multilevel
marketing.  ... [U]nlike pyramid .. schemes, MLM's have a
real product to sell.  More importantly, MLM's actually sell
their product to members of the general public, without
requiring these consumers to pay anything extra or to join
the MLM system.  MLM's may pay commissions to a long
string of distributors, but these commissions are paid for
real retail sales, not for new recruits."

Now consider how our "wealth distribution program" above
works.  Which is it, do you think?  Pyramid scheme or MLM? 
Bzzzz ... time's up.  All who think it's a classic pyramid go
to the top of the class.


Not surprisingly, the U.S. Federal Trade Commission ("FTC")
pays close attention to so-called MLM's that are, in reality,
nothing more than pyramid schemes.  It regularly prosecutes
the promoters of such schemes, obtaining injunctions and
orders freezing the assets of the promoters to be applied
in redress of victims.  If you knowingly participate in a
pyramid scheme, you too can be named as a defendant in
such an action.

Bear in mind that as a distributor (whether you're participating
in a legitimate MLM program or an illegal pyramid scheme),
you're legally responsible for the claims you make about the
company, its products and business opportunities.  It is no
defense that you're merely rehashing the same old
representations made to you by the company.  The FTC can
require you to verify the research behind any claims you make.
For more on the subject of representations and your
obligation to be able to back them up, read "Not Just Six Lines ...
65 Characters" at http://www.ahbbo.com/adsftc.html .

In addition, if you solicit new distributors, heed the FTC's
warning in its Consumer Alert, "The Bottom Line About
Multilevel Marketing Plans": "You are responsible for the claims
you make about a distributor's earnings potential.  Be sure to
represent the opportunity honestly and avoid making
unrealistic promises.  If those promises fall through, remember
that you could be held liable."

Finally, here's the FTC's tips for evaluating a multilevel
marketing opportunity:

"1.  Avoid any plan that includes commissions for recruiting
additional distributors.  It may be an illegal pyramid.  [And,
by the way, calling it "benefactoring" won't help.  Just a
handy hint ...]

"2.  Beware of plans that ask new distributors to purchase
expensive products and marketing materials.  These plans
may be pyramids in disguise.

"3.  Be cautious of plans that claim you will make money
through continued growth of your downline, that is, the
number of distributors you recruit.  [Don't take this tip out
of context - by definition, the more people you have in
your downline, the more you'll legitimately make in MLM. 
What the FTC is saying here is to watch out if the plan
rewards you for recruiting per se, rather than paying you
a commission on sales of product to the general public
generated by your downline.]

"4.  Beware of plans that claim to sell miracle products or
promise enormous earnings.  Ask the promoter to
substantiate claims.

"5.  Beware of shills - "decoy" references paid by a plan's
promoter to lie about their earnings through the plan.

"6.  Don't pay or sign any contracts in an "opportunity
meeting" or any other pressure-filled situation.  Insist on
taking your time to think over your decision.  Talk it over
with a family member, friend, accountant or lawyer.

"7.  Do your homework!  Check with your local Better
Business Bureau and State Attorney General
about any plan you're considering - especially when the
claims about the product or your potential earnings seem
too good to be true.  [Don't rely too much on the BBB
though - companies pay to be listed with them so they're
not as authoritative and independent as they seem.  Asking
whether they have complaints on file about your particular
program is worthwhile, however.]

"8.  Remember that no matter how good a product and how
solid a multilevel marketing plan may be, you'll need to
invest sweat equity as well as dollars for your investment
to pay off."

By testing any opportunity against the above tips, you'll
go a long way to ensuring that what you're getting yourself
into is a legitimate MLM program and not an illegal pyramid.
Probably the best gut check of them all though is the good
old "if it sounds too good to be true, it probably is". 

Hmm ... $1.1m in 39 days for an investment of $60 ...
somehow, I JUST don't think so ...


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