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Introduction
Despite vigorous media and regulatory discussions of pyramid scheme fraud in connection with companies such as Herbalife International and growing recognition of consumer vulnerability (Federal Trade Commission, 2016a, 2016b), pyramid schemes are rarely discussed within academic literature and are often conflated with Ponzi schemes. The dearth of formal research limits academic contributions to active policy, regulation and prevention discussions. One reason for limited research might be the complicated practical and legal environment in which pyramid schemes operate. Another might be lack of access to data from past cases. Modern pyramid schemes often take the form of multi-level marketing (MLM) business opportunities. Providing the cover of a proffered product/service, illegal schemes emphasize recruitment of new sellers and over retail sales (Vander Nat and Keep, 2002). In such situations, the business opportunity functions as an endless chain recruitment vehicle, passing payments made by the newest entrants to those further up the pyramid.
Fortune Hi-Tech Marketing (FHTM) was one such MLM firm that operated from 2001 to 2013. FHTM faced pyramid scheme allegations from six states and the Federal Trade Commission (FTC) and is now defunct after a 2014 settlement agreement with the FTC. Data made available from this federal settlement includes the population of over half a million participants. This is the first study to analyze dynamics of pyramid scheme activity across the nation, using participant level data from a former scheme. This provides a unique opportunity to understand variation in scheme membership rates across regions and to explore differences between pyramid and Ponzi dynamics.
We begin with a discussion of pyramid and Ponzi schemes and their connection to affinity fraud. Beyond affinity, we continue with other factors expected to affect victimization, including culture, economic conditions and education. We then discuss the case of Fortune Hi-Tech Marketing and analyze participant data in the context of the literature reviewed. Finally, recommendations are presented, informed by this analysis.
Pyramids, Ponzis and affinity fraud
To understand the context for pyramid scheme fraud, set within in a MLM context, it is important to understand the distinctions between related realms of fraud and business practices. A Ponzi scheme promises returns in the absence of underlying legitimate business or investment activity, with returns paid from the investments of recently recruited investors (Shiller,...