Last updated: 4 February 1998
From time to time on the Net, you will come across people offering you amazing investment opportunities. Some may be legitimate, but a lot of them will be fraudulent.
Consider this: Junk email on the Internet is going to annoy the vast majority of the recipients because it's typically sent out willy-nilly to every active Net address: unlike its snail-mail cousin, there is no attempt to "target" the mailshot.
So, why bother doing it? Because it's CHEAP. Sending out bulk emails costs a tiny fraction of what sending out an equivalent number of paper letters would cost. But the mailer is going to antagonize a lot of people, so it's only worth doing in cases where they only need a small number of "customers". That rules out the vast majority of legitimate concerns, leaving you with a high proportion of fraudulent schemes being advertised in this way.
Chain letters work (if that's the right word) by persuading the victim to send a copy of the letter to several new recipients, and to send something else (usually money) to the people named in the letter. By adding their name to the bottom of the list, the victim hopes to eventually get some money back from other people further down the chain. This is usually a forlorn hope, as I will show.
The classic Make.Money.Fast letter consists of several sections:
The exact details vary slightly. Often the victim will be sending money to people as "payment for reports" or with the instruction "please add me to your mailing list" (why?)
The letter will be very insistent that the scheme is perfectly legal, and will often quote section numbers of the "Postal Lottery Laws" as if they confirmed the legality of the scheme. In fact the section numbers are from the U.S. Code, and are the very ones that outlaw chain letters! Look at what the U.S. Code has to say about postal lotteries ( 18 USC sec 1302 ), mail fraud ( 18 USC sec 1341 ), or wire fraud ( 18 USC sec 1343 ) for example. Also check out the United States Postal Inspector's office Chain Letter Page for more details.
It's still illegal. In fact it's illegal in practically every country with an Internet connection. Click here for a (sadly, incomplete) list of the relevant legislation.
Only for a short time. The problem is that the letter needs to be forwarded to an increasing number of people, but the population of the world is finite. Sooner or later the "pool" of people prepared to take part in the scheme will be exhausted and it will collapse. When that happens, it's all the new investors that lose out: the only "winners" are those who joined at the start. To put it bluntly, the only people likely to make any money are those who start the scheme (since they aren't spending any money, just receiving it).
Named after one Carlo (or Charles) Ponzi, an Italian immigrant who moved from Canada to Boston in 1919 and devised a scheme which promised to make money by trading vouchers in the European countries devastated in the First World War. In fact the only money coming in was from new investors: this money was used to pay "dividends" to earlier investors. The inevitable collapse occurred, Ponzi was arrested, convicted and deported back to Italy.
Modern variants of Ponzi's scheme come in two flavours: the
utterly outlandish concept ("Rattlesnake meat will be The Next Big
Thing"), or those that are extremely unclear about where the
profits are supposed to come from (the latter variety will often have
a vaguely innocuous title like a "reward club"). Both types
will often come with an impressive list of past investors including
lawyers, policemen, politicians and so on.
As with the chain letter scams, only the people who get in at (or near) the beginning stand to make any money from the scheme. All the later investors will lose out when the scheme collapses (either through its own weight, or when someone spots the fraud).
For further reading, go to this site dealing with Types of Investment Scams.
These can trace their roots (in concept, at least) back to the old illegal "pyramid selling" schemes of the 1960s. Although outlawed, pyramid selling hasn't completely died out: one such scheme in Albania collapsed in 1997, bankrupting millions of people.
The original "pyramid" concept, in case you're not familiar with it, went as follows: There was a product (or a service) to be sold, and you paid a fairly hefty "joining fee" to get into the business. Once inside, you could either make a small amount of money by selling the product yourself, or a much larger amount of money by recruiting other people to sell the product in your place - you would take a "commission" on anything they sold (be it the product itself or joining fees of people they in turn recruited). Hence a "pyramid" structure would build up, with the army of sales people at the bottom supposedly selling the product, and the proceeds going as "commission" to the people stacked above them in the hierarchy. In practice, most of the money sloshing about was the joining fees of new participants.
MLM schemes (sometimes referred to as matrix marketing) try to get round the basic illegality of "pyramid" schemes by making adjustments to the structure, with varying degrees of success.
As stated above, there is always a product (or service) to be sold, but if much of the thrust is towards getting you to sign up more people to do the actual selling for you, the chances are you're looking at an illegal pyramid scheme. Many adverts won't describe themselves as MLM schemes (they may simply say "Home workers wanted") so you need to be on your guard when presented with any marketing opportunity.
One important point. Some MLM schemes are perfectly legal. That said, my original caveat at the top of this document holds good: if someone is reduced to spamming a MLM scheme via email or Usenet, it should be regarded with the utmost suspicion.
For further reading, check out what The Federal Trade Commission have to say on the subject.
Please send comments to the address listed on the contacts page.