As new business models continue to develop and existing ones evolve, it can be difficult for consumers to tell the difference between a legitimate business operation and an illicit pyramid scheme.
Pyramid schemes are illegal under federal and state laws. The federal Racketeer Influenced & Corrupt Organizations Act (RICO) addresses pyramid schemes and sets forth recovery for victims. At the state level, pyramid schemes are illegal under the Michigan Consumer Protection Act and the Franchise Investment Law. These state laws also provide those cheated in a pyramid scheme the opportunity to recover their losses.
Currently, state lawmakers are revising Michigan’s pyramid scheme laws, primarily because they have not been updated in many years. House Bills 5726, 5727, 5728 and 5729 are aimed at helping consumers more easily distinguish an illegal pyramid scheme from legitimate multi-level marketing operations such as Amway, Mary Kay, and Avon. If enacted, the new statute will be known as “The Pyramid Promotional Scheme Act.”
The legislation was recently passed by the Michigan House of Representatives and has been forwarded to the Senate.
What Is a Pyramid Scheme?
A pyramid scheme is a fraudulent business plan that compensates individuals for recruiting others into the program and seeks to deprive individuals of their monetary investment in the company. In fact, no useful product is ever really sold to consumers in a pyramid scheme. The intent behind the plan is to bring in money for the company founders – and nothing else.
Because a pyramid scheme purports to be in the business of selling products to consumers, it may appear on its face to be a multi-level marketing company. However, a pyramid scheme is nothing of the sort. This is because there is minimal, if any, effort to sell a useful product. Instead, money is made by recruiting other people to join and market the program. A pyramid scheme makes nearly all its profits by recruiting new investors. Some examples of companies that customers, distributors, and investors have accused of these types of fraud, false advertising, and deceptive sales practices include:
It is important to note that multi-level marketing companies, unlike pyramid schemes, are not necessarily illegal. A multi-level marketing company, such as Amway, involves individuals who are selling bona fide products. These individuals are compensated based on how much product they sell.
In fact, the concept of multi-level marketing was popularized by Amway in the 1960s. Amway recently testified before the Michigan Legislature in support of the proposed bills.
What is the New Michigan Pyramid Scheme Legislation?
House Bills 5726, 5727, 5728 and 5729 would make it clear that a pyramid scheme is any plan that primarily compensates individuals for recruiting others, and not through product sales.
Under the bills, the penalty for intentionally promoting a pyramid scheme would be a felony with up to seven years in prison or a fine up to $10,000. The legislation also makes it a misdemeanor to participate in a pyramid scheme and would require that a majority of compensation comes directly from sales.
The Michigan legislation is similar to laws already adopted in other states.
How Can You Spot a Pyramid Scheme?
Consumers can have a difficult time spotting the warning signs. Here are some indications of an unlawful pyramid scheme:
- Recruiting new people is the primary focus of the program and not the sale of a product or service.
- The program claims you will make money through continued growth of your “downline” (commissions on sales made by new distributors you recruit), rather than through the sale of products.
- The program brags about the high earnings of a few top performers.
- The program includes plenty of “testimony” and “success stories.”
- The program asks you to buy expensive inventory.
When a person suffers a financial loss because of a pyramid scheme, a business fraud lawsuit may be filed against those who operated the illegal business venture.
Pyramid Scheme Damages & Recovery
In situations that involve larger pyramid schemes, a class action suit can help those cheated recover their losses. Because pyramid scheme class actions are often dependent on facts, it is important that victims contact an attorney right away. The lawyer handling the case can then examine public documents and any complaints that were filed against the company. In the end, a jury will likely determine whether the company crossed the line into operating an illegal pyramid scheme.
If you have been the victim of an illegal pyramid scheme, contact the experienced attorneys in Sommers Schwartz’s Commercial Litigation Group today. For additional information, please watch the video below.