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Pyramid Schemes: If It Looks Too Good To Be True, It Probably Is


Now to matters of personal finance. But actually, today, we want to talk more about a common scheme or scam, depending on your point of view, that ensnares thousands of college students every year. Now you figure, if you've made it to college you'll probably be pretty smart, and you figure a college student could smell a pyramid scheme a mile away, but you might be amazed at how often the, quote, amazing business opportunity that their peers want to get them into turns out to be a scam or at best a scheme that costs more in time and money than it earns. That's the situation Darrin Moret found himself in as a freshman in college, and he decided to write about it for Zocalo Public Square so others can learn from his experience. And he is with us now. Darrin, thank so much for joining us.

DARRIN MORET: Thanks for having me.

MARTIN: Also joining us is Sheryl Harris. She's a consumer columnist for The Plain Dealer in Cleveland. She's reported on financial scams over the years. Welcome to you, thank you so much for joining us.

SHERYL HARRIS: Thank you for having me on.

MARTIN: So, Darrin, tell us what happened. It started with a pretty girl, as I understand it.

MORET: Yeah, well, yeah, that's a moniker I would use to describe her. But, basically, a classmate of mine approached me - this was freshman year of college - and approached me with what she called a business opportunity, or a project that she would like me to check out with her and some other people that she brought along as potential recruits. After going to a meeting, which was held at a hotel near LAX airport, we were given a sales pitch for a company selling legal insurance.

The premise was that if you pay a certain amount per month, then you have legal insurance on call whenever you like. And you also get to recruit people in your social network - your friends, family - and then you get a percentage of whatever they bring in. And so starts your business. Your own business.

MARTIN: And so what was attractive about it to you?

MORET: Well, the way they market it was something that you basically - an opportunity to earn passive income. Meaning that you don't have to work a certain amount of hours to get a certain amount of pay. This is the kind of pay that once you start recruiting these people, the checks just kind of more or less roll into your bank account.

MARTIN: Yeah, you're earning money while you sleep. So when did you figure out or when did you start to believe that this wasn't exactly the great deal that you had hoped it would be?

MORET: I would say very shortly after I joined. In fact, my total involvement with this company didn't last more than about a week. However, it was a bunch of small red flags here and there. The first red flag, which I should have picked up initially, was the buy and entry cost for this company was - I want to say it was $125 and then they said that the price would be raised if you didn't sign up the very same evening of the event.

The second thing is once they actually got me as a member, there was very little mention of the actual sale of this supposed legal service. It is an actual legal service, don't get me wrong, but at the same time, it was very apparent that the focus was not on selling memberships to consumers but just recruiting more and more people underneath me to build up my business, for better lack of terms.

MARTIN: OK, you decided after a certain point this was not for you. Did they let you go willingly or did they try to argue with you when you decided that you'd had enough?

MORET: They let me go easily. Basically, he was trying to give me a fatherly pep talk about how, you know, if I quit everything before - just after I start I'll never get anywhere. Something to that effect.

MARTIN: Oh, wow. Guilt trip. Oh, my goodness.

MORET: I'm probably making it sound a little worse than it was. But something to the effect that, you know, you need to kind of stick with things in order to get ahead.

MARTIN: Let's bring Sheryl into the conversation. You're sitting here with me and I see you nodding at just about everything that Darrin is saying. Heard it before?

HARRIS: It's so classic, because, you know, this one-on-one pitch - hey, I know you, I'm like you. I'm making money, come join me. You can make money, too. You know, going through some network. Student to student. Coworker to coworker. Through a church.

This is - it's all very one-on-one sales. Dragging people to these meetings, and the meetings are usually a frenzy of people standing up and doing testimonials. I made a thousand dollars in just two minutes. I mean, it's high pressure sales. And that's really evident in, you know, buy now. Buy your package now and you can get a discount because later these are going to cost people a lot more money. And, the other classic marker here, is there really aren't sales to the public at large. Your income stream really comes from sucking all these other people that you know in. As many people as you can.

MARTIN: And the obvious question, Sheryl, is, is this legal?


MARTIN: It's not?

HARRIS: Well, there are two things that people get confused. They confuse multilevel marketing and pyramid schemes 'cause they're built a lot the same way.

MARTIN: Yeah, what's the difference? Yeah, what is the difference? Because you notice I was struggling over what term to use. Is it a scam or is it a scheme?

HARRIS: And a lot of times pyramids will call themselves multilevel marketing. But here's the basic difference. In multilevel marketing, yes, you are recruiting other people to work under you and you're getting a cut of their sales. But, the bulk of the money that's coming into the company is from people who have nothing to do with the company. It is to the public at large. I have a product, isn't it great? Would you like to buy it? And the public is buying it. In a pyramid...

MARTIN: I'm thinking of a food storage material that I'm particularly fond of. I think that it's traditionally sold by stay-at-home moms, right?

HARRIS: Right.

MARTIN: It's something that was traditionally sold in that way. That's multilevel marketing.

HARRIS: Exactly.

MARTIN: But it is a real product. And I love it.

HARRIS: And it goes on for years because the products, people swear by them. They don't want to sell them necessarily, but they like to buy them. So, that's multilevel marketing. In a pyramid scheme, you're recruiting all the time. You're getting more people to bring more money in and that's - you have a product because it's usually just a sham product. No one outside really wants it, or you can't really prove the value of it. You don't really know.

But, the people who are buying it tend to be people who are already signed up because the more products they can buy or sell, they even sell to themselves or sell to each other, because the more they can sell, the higher up the pyramid they can move. And the bigger cut of what they're bringing in, they can allegedly receive down the line, so...

MARTIN: So it's based on inflated inventory or inflated value.

HARRIS: Exactly.

MARTIN: Why college students? Are college students the main people who seem to be attracted to this?

HARRIS: No, frankly, I'm appalled to hear that it's on campuses. Although, I know of students who've lost money to these things before. In these schemes.

MARTIN: But you're saying it's not mainly college students or you're saying college students are a ripe target?

HARRIS: They're a ripe target. But you'll also find it among professionals. I wrote about a scam once that happened in - a pyramid in Akron, Ohio and a lot of the people who were going to those meetings and selling the products were cops. I mean, anyone can do it. Professionals, blue-collar workers, just...

MARTIN: Is the idea basically to tap into people's social networks...


MARTIN: ...so you can figure out why a student like Darrin or college students like him. So, Darrin, what do you draw from this? What would you like other people to learn from your experience? And you were brave enough to write about it. It's not easy to, sort of, admit one's own failings or mistakes.

MORET: Definitely.

MARTIN: So applause to you for doing that. But what do you want the take away to be about this?

MORET: The take away is, often times, when things seem too good to be true, they almost always are.

MARTIN: Sheryl?

HARRIS: I think that Darrin's experience is rare in that he got his money back. And, what I would like people to know, is once people make that initial investment and they make money, they invariably go look for other funds to sink in because the return looks so great at the beginning. So there are people who've wiped out their college savings accounts, who've wiped out their pensions, who've taken out loans against credit cards and even home equity loans to be part of these pyramids. And, when the pyramid collapses, the losses are huge. So, most people don't get their money back.

MARTIN: Darrin, did you get your money back?

MORET: I did. I canceled my membership within the week and I think there was a weeklong or three-week cancellation period in which you'd actually get reimbursed for whatever the initial startup cost was. I was lucky enough. I turned in the papers and they did send me my $125 check or whatever it was. So I was lucky. Yeah. It was a cheap lesson.

MARTIN: Well, that's great. Darrin Moret is an English teacher. He joined us from Hsinchu City, Taiwan, where he is working now and presumably keeping his money in his bank account where it belongs. Darrin, thank you so much for joining us.

MORET: You're welcome.

MARTIN: Sheryl Harris is a consumer columnist for The Plain Dealer in Cleveland, Ohio. And she was kind enough to join us in our Washington, D.C. studio. Sheryl, thanks so much for joining us.

HARRIS: Thank you. Transcript provided by NPR, Copyright NPR.