2003-08-22 / Columnists

Notes On Consumer Affairs

By Assemblywoman Audrey Pheffer
Notes On Consumer Affairs By Assemblywoman Audrey Pheffer

Audrey PhefferAudrey Pheffer

We all know that money does not grow on trees, but some of us may still believe that it can multiply in pyramids. At first glance, pyramid schemes appear to be an attractive way to increase wealth. In reality, it only increases the wealth of the few people who are on top of the pyramid. This article will summarize differences between pyramid schemes, which are illegal in New York State, and multi-level marketing. It will explain how you can avoid being defrauded.

A pyramid scheme is a system of making money based on increasing numbers of recruits, also known as "investors." It is called a "pyramid" because at each level, the number of recruits or investors increases. The initial promoter recruits investors, each of whom recruits more investors, and so on. The small group of initial promoters requires a large base of later investors to support the scheme by providing profits to the earlier investors.

New York State’s General Business Law, Article 23A, Section 359-fff sets forth penalties for initiating and participating in pyramid schemes. Pyramid schemes are also known as chain distributor schemes. The sale of products may or may not be necessary in a pyramid scheme. If a product is involved, it is often only to sidestep the illegality of profiting primarily from recruiting other investors. If a product is involved, the selling of the product is less important than recruiting more investors.

On the other hand, multi-level marketing is a means of selling products directly to a consumer without the use of a retail store. Products and services are sold through a network of distributors set up to resemble a pyramid. Each distributor recruits and trains distributors and will earn a commission predicated on the distributors’ sales, as well on his or her own sales. Some multi-level marketing companies are actually pyramid schemes based on this structure. The difference between a legitimate multi-level marketing company and a pyramid scheme is that success in a multi-level marketing company is based on quality products and service, and the work required to sell the products and services and the recruitment of new investors is secondary.

The failure of pyramid schemes is inevitable. The reason they always fail is that their success depends upon the ability to recruit more investors. Since there are a limited number of people in any community, the ability to recruit is diminished by the number of people involved in the scheme. Multi-level marketing companies can be in existence for many years. Although recruiting additional people is essential, quality products or services are the true backbone to the perpetual quality, and not the ability to recruit.

Before getting involved in a pyramid scheme, think again. You can avoid being defrauded by not participating. In many instances, participants target closely knit groups like religious or social organizations, sports teams and college students. Resist the temptation to invest just because you have a bond with someone. Also, find out if there is a demand for the products or services being sold. If the promoters appear to make most of their money by selling distributorships or large start-up inventories, stay away.

Use this information as a starting point. For additional information, contact the New York State Office of the Attorney General, Consumer Fraud and Complaints at (800) 771-7755, or the New York State Office of the Attorney General Investor, Protection and Securities Bureau at (212) 416-8200. More information is available on the Internet through the Office of the Attorney General at www.oag.state.ny.us.

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