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PYRAMID SCHEME ALERT Calls Madoff Scandal a Failure of SEC and FTC to Enforce Laws Against Pyramid and Ponzi Schemes
December 15, 2008
For Immediate Release
Pyramid Scheme Alert, the only consumer group in the world focused directly on pyramid/Ponzi scheme fraud, charges that the Bernard Madoff Ponzi Scheme is the tip of a far wider pattern of pyramids and Ponzis. In a letter to the chairmen of the FTC and SEC, PSA charges that the lapse of FTC and SEC regulation has led to an epidemic of pyramid frauds and demands renewed regulation.
Madoff, a famous Wall Street financial manager, has been arrested and charged with defrauding investors of nearly $50 billion in a Ponzi investment scheme.
(In both pyramids and Ponzis, earlier investors are paid by later ones in an unsustainable model, promoted deceptively. In pyramids, the investors recruit new investors; in Ponzi's, recruitment is managed by the organizer.)
In the letter to FTC Chairman, William E. Kovacic and SEC chairman, Christopher Cox, PSA President Robert FitzPatrick noted the following:
-- The illegal pyramid scheme is now ubiquitous on the internet, camouflaged as matrix selling and cash gifting. These naked pyramids lure millions of Americans by boldly asserting their legality and citing lack of government action as evidence of their legitimacy. In just one case (12DailyPro.com) of a widespread type of internetbased pyramid scheme, called Autosurfing, the promoter raked in $500 million in a few months.
-- The direct selling industry has transformed into pyramid selling in which consumers/investors are deceptively induced to purchase (not sell) several thousand dollars worth of goods a year and then recruit other consumer investors to do the same in an endless chain reward plan. Little or no goods are retailed and 40-60% of the inflated price of the goods is transferred directly to the pyramid promoters at the top.
-- Eight direct selling companies that operate as endless chain recruitment schemes are now listed on major stock exchanges or on the over-the counter markets. The aggregate capitalization of these eight schemes is approximately $5 billion. One of these, Your Travel Biz.com, is currently prosecuted by the California Attorney General who called it a gigantic pyramid scheme. The other publicly trade companies that use the pyramid model operate with impunity.
-- The publicly traded schemes are supported by a clique of analysts who hype the stocks and obscure the nature of the business and the losses they inflict on consumers. Their untenable business models continue only by gaining the investments of a churning base of salespeople who are in fact new investors and the source of the revenue paid to earlier investors. 99% of the investor/salespeople (last ones in each year) ultimately lose money and 60-80% of them quit the schemes within a year after losing money. Overall, the securities market has little knowledge or understanding of the true nature of the schemes.
-- The SEC and the FTC over the last eight years of the Bush administration have assiduously avoided investigation of Ponzi and Pyramids. After receiving detailed reports about failures to disclose the endless chain nature of Usana Health Sciences and Herbalife International, the SEC issued take no action letters.
The first FTC chair, appointed by President Bush in 2001, Timothy Muris, came to the post directly from a law firm representing the largest of all pyramid selling schemes, Amway. Under his leadership, 30 years of FTC policy was reversed and investigations and prosecutions of pyramid selling schemes abruptly ended. Amway is currently the target of a government prosecution in England seeking to close it down for operating an endless chain. The multi-level Amway business model was banned in China in 2005, while retail-based direct selling was allowed. Amway is currently embroiled in a major class action suit in the USA that charges it with operating an illegal pyramid scheme.
Regulation of pyramid schemes and Ponzis requires vigilant oversight and prosecutorial will. Outwardly they appear normal and, until total collapse, they seldom produce large-scale complaints or controversy. The pyramid selling schemes operate in a state of continuous collapse as most investors quit the scheme each year, but the schemes are able to continue by deceptive recruitment of new investors.
The basic fraud of a pyramid or Ponzi can be revealed only upon closer examination of the operations.
Reliance upon complaints or blatant financial irregularities as cause for government action leaves the public exposed and allows the schemes to operate unfettered. Normal market mechanisms such as word of mouth warnings from consumers that were harmed or obvious indicators such as bankruptcies or police records of promoters do not apply in the white collar and well disguised world of pyramids. Until his first indictment, the infamous Charles Ponzi never missed a payment to investors in his namesake fraud of the 1920s and, therefore, did not generate "complaints."
Madoffs respected stature as former chair of NASDAQ is typical in the world of pyramids and Ponzis where the promoters are viewed as upright business people who claim religious faith and who engage in philanthropy. Many are prominent in churches or the chambers of commerce.
The PSA letter noted that regulators waiting for complaints or other obvious signs of fraud recently resulted in a great tragedy in the US and Canada. More than 1,000 family farms were lured into a pigeon-breeding Ponzi scheme. The promoter paid investors regularly for seven years, relying purely on new investors for his revenue, as the scam spread widely across the country and into the USA.
When the scam collapsed in June of this year, the farmers were ruined with many facing foreclosure on their family farms. Reputable banks had made loans to the farmers to participate in the scam. Though several state Attorneys General in the US banned the scheme in their respective states or warned consumers, no regulatory agency in the USA or Canada ever brought charges against the promoter.
Each month, the Pyramid Scheme Alert website is visited by consumers, educators, regulators, attorneys and journalists from over 100 countries.