Season 2 Finale: Ponzi, Pyramids & MLMs… Oh My!

About the Episode

Welcome to the season two finale of Making it Count! This episode our hosts are joined by the show’s executive producer, Lauren Buys, to hear all about infamous financial fraud cases. Together they discuss Ponzi schemes, pyramid schemes and shady multi-level marketing strategies to help listeners learn how to protect themselves. She covers the life of Charles Ponzi, a scheme involving the hit Broadway show Hamilton and the terrible practices of LuLaRoe. Tune in now on your favorite podcast app or read along below!

3:40

Cristina asks Question 1: “I am really eager to get started, so let’s jump right in! Let’s start with a general question about investment and money-making schemes. Why do you think people are so vulnerable to them?”

Lauren responds: “If you think about it, we all want to feel financially secure and be free from the day-to-day concern of how to pay the bills and support our families. We all want that financial freedom that everyone tries to sell. I think that when someone comes along with the promise of an investment or opportunity that has the potential to provide that security, people want to believe it – so they do.”

Learn more: Step-by-Step Guide to Report Financial Identity Theft and Fraud

4:25

Will asks Question 2: “Can you talk about some of the hallmarks of a scam? How can our listeners recognize them?”

Lauren responds: “Everyone knows about the traditional methods of investing and making money. For example, CDs are a traditional and safe form of investments offered by legitimate companies. You know you will receive a return from investing in a CD because they’ve been tried, true and tested over time. However, anytime someone offers you an investment opportunity above ten percent, you should always do a double take because that’s too good to be true.”

5:10

Cristina asks Question 3: “That’s a great point – and it leads right into our first type of scheme. Lauren, can you explain what a Ponzi scheme is?”

Lauren responds: “Ponzi schemes are named after a man named Charles Ponzi – but he wasn’t the first person to run this type of scam, just someone whose scam was so widespread and made so many headlines that he had the honor of having it named after him.”

“A Ponzi scheme is a type of investment fraud where investors are promised a specific return on their investment – but the investment isn’t real. The person running the scheme uses money from later investors to pay back the early investors. Eventually, the scheme collapses on itself because it runs out of money – and inevitably, it’s the people who arrived last who lose the most money. Charles Ponzi actually promised his investors a 50% return in only 45 days and a 100% return in 90 days.”

Cristina asks a follow-up question: “What was Charles Ponzi investing in or selling?”

Lauren responds: “He was selling postal reply coupons that he had bought at a discounted price from different countries around the world. Charles Ponzi would purchase these coupons from overseas on behalf of his clients and then markup their prices to receive his 50% return. He used some of these funds to repay the investors and pocketed the rest for himself.”

Cristina asks another follow-up question: “That’s so interesting. Can you tell us more about Mr. Ponzi?”

Lauren responds: “Charles Ponzi ended up losing $20 million from this scheme, which is roughly $250 million today. Before losing his money, he bought a mansion in Massachusetts and a locomobile which was the finest car of that time period. Interestingly, a journalist from that time was actually trying to expose Ponzi’s schemes by writing about them in his work. However, Ponzi sued the writer for libel in court and ended up winning $500,000.”

Cristina asks another follow-up question: “So did Charles Ponzi ever get caught?”

Lauren responds: “Yes. Charles Ponzi did receive federal charges against him in the United States and Canada. He eventually went to prison and his health deteriorated over time so he ended up dying pretty quickly.”

Cristina asks another follow-up question: “So what’s an example of someone who would be the modern-day Charles Ponzi?”

Lauren responds: “The most famous example in modern history was run by Bernie Madoff, whose clients lost $65 billion dollars. He was sentenced to a 150-year prison sentence, but he recently passed away."

11:45

Will asks Question 4: “So we know about Bernie Madoff, but I worry a little that our listeners will hear $65 billion and think, that just doesn’t apply to me. Do you have an example of a scheme that might be a bit more relatable to our listeners at the moment?”

Lauren responds: “I do – and this one is super interesting. It’s the Hamilton Ponzi scheme and it involves the hit Broadway musical, Hamilton.”

“Back in 2015, Hamilton had just moved from off-Broadway to Broadway and it was a huge hit. Tickets were impossible to get. A man named Joseph Meli was known to be the guy in New York who could get his friends tickets to any show or concert. He was a New York event promoter and Hamptons socialite. He actually ran a concert series that featured celebrities such as Billy Joel, Prince, and James Taylor. He sold each ticket for $3,000. He had photos of himself partying with executives and celebrities, so many people believed he was legit.”

“He told potential investors that he knew the producer of Hamilton and had an opportunity to buy 35,000 tickets in a block. In reality, he actually did reach out to the producer of Hamilton but the producer denied his offer. His plan was to use money from investors to buy the tickets, which would be resold with a 10% markup… guaranteeing a 10% return for all investors. His plan was to book 26 shows to achieve 35,000 tickets.”

“One of the most well-known people to fall for this scheme was Micheal Dell, the CEO Of Dell technologies. So again, falling for a scheme could happen to anyone.”

Cristina asks a follow-up question: “Did Joseph Meli ever get caught for his scheme?”

Lauren responds: “His scheme lasted for about two years before he was caught. He also had two accomplices who were into investment funding. In all actuality, 10% doesn’t sound ridiculous when you think about people buying tickets and scalping them.”

16:30

Will asks Question 5: “Can you run down the hallmarks of a Ponzi scheme and how our listeners can avoid being caught up in one?”

Lauren responds: “Sure. The primary hallmark is that it’s an investment scheme that’s promising a return and may publicize higher-than-average returns. I mentioned Bernie Madoff earlier and his company attracted new investors by publicizing returns that ‘beat the market’ year after year. People should always be skeptical of guaranteed returns and returns that seem too good to be true. A lot of time the schemer will avoid answering questions about returns and make the process seem too complicated to explain.”

17:45

Cristina asks Question 6: “One thing that I think is confusing is understanding the differences between a pyramid scheme and a Ponzi scheme. I feel like those two terms are used interchangeably. What’s the difference?”

Lauren responds: “That’s a great question. In a Ponzi scheme, the scammer repays early investors with money from later investors. A pyramid scheme is a scheme where the company behind it earns money primarily from recruiting new people into the scheme. So the person at the top is at the tip of the pyramid, and membership increases exponentially as each recruit brings in new people. There may be no products to sell or the income from the products can be incidental.”

Cristina asks a follow-up question: “So what’s an example of a pyramid scheme?”

Lauren responds: “Back in 2013, there was a company called Fortune Hi-Tech Marketing, which was a Kentucky-based company that called itself a multi-level marketing company. It recruited people to sell a bunch of different products, including items from cell phone providers, Dish Network, Frontpoint Home Security and even health and beauty products. When salespeople were recruited they would pay between $100 and $300 in annual fees plus additional payments to get access to higher sales commissions and recruiting bonuses.”

Cristina asks another follow-up question: “I don’t remember hearing about this one. How many people were involved?”

Lauren responds: “Ultimately over 350,000 people in the United States and Canada bought into the scheme. Even Dish Network wasn’t aware of this company selling its products.”

Will asks a follow-up question: “I know you said that people earn money from recruiting new people. So… did anybody make money selling those products?”

Lauren responds: “Very few people. The company itself released numbers that revealed that 95% of its sales reps earned less than $3,100 a year and 29% earned nothing at all. That’s the real hallmark of a pyramid scheme. The products are essentially an afterthought. People who get in early may earn some money, but they’re going to be doing it on the backs of the people they recruit.”

23:00

Cristina asks Question 7: “Lauren, you mentioned MLMs and I know that a lot of our listeners are probably wondering, what’s the difference between a pyramid scheme and an MLM? Because to me, they seem like they’re the same thing.”

Lauren responds: “This is where the lines get blurred because if you look at the structure of an MLM, it literally looks like a pyramid. There’s the company at the top and all the sales reps in widening layers underneath. I know we’ve all seen The Office cold open where Michael gets sucked into a get rich quick scheme selling calling cards and tries to recruit others in the office to join him. They all challenge him that it’s a pyramid scheme, but he doesn’t believe them until Jim literally draws a triangle around the recruitment structure.”

Will asks a follow-up question: “But they’re legal, right?”

Lauren responds: “They are, although there are a lot of people who think they shouldn’t be. They’ve got great lobbyists! When the products are decent, they can stick around a long time and people can legitimately earn money. Some examples of MLMs that have been around for a long time include Mary Kay, Tupperware, Avon, Beachbody, Pampered Chef and Herbalife. I think most people know at least one person who’s been involved in one of these companies. However, there are some MLM companies that are actually shady.”

“I think the one that’s been in the news most recently is LuLaRoe. Their products are colorful women’s clothing items in modest styles. As of 2017, they had more than 80,000 ‘individual distributors’ selling their clothes. The issue that a lot of people had was that first, the clothes aren’t that well made. Tons of people were posting pictures of ripped leggings and shirts on social media. It’s pretty hard to sell stuff when people can scroll down their Instagram feed and see a dozen examples of your products falling apart.”

Will asks another follow-up question: “So we know that LuLaRoe’s products were poorly made, but what happened to the people who were selling the products?”

Lauren responds: “LuLaRoe required new distributors to make a significant up-front investment to buy inventory: as of 2017, the company said the average was between $4,925 and $9,000. The official recommendation was that representatives should keep about $20,000 of inventory on hand.”

“In 2017, there was a billion dollar class action lawsuit filed by people in California who claimed that the company advised individual distributors to borrow money, max out their credit cards and even sell breast milk to buy inventory.”

“Unfortunately, the class action is still pending, but they were also sued by their chief clothing supplier, which claimed they were financially insolvent and running a shell game to avoid paying their debts. The State of Washington also settled a lawsuit for $4.74 million, which was divided among their distributors in the state. They now publish accurate income projections on their website – which show that the median annual income of a distributor is only $1,444. But they’re still in operation.”

Learn more: 5 Ways to Achieve Positive Business Cash Flow

32:25

Will asks Question 8: “Isn’t there a point where you just can’t recruit new representatives or investors?”

Lauren responds: “That’s a fantastic question and it’s so important. I mean, the people who join have to be willing to relentlessly hound everyone they know to join – and who wants to be that person? When I was gathering information about these schemes, I found a page on the Michigan Attorney General’s website that showed how ridiculous the claims of unlimited income are. Say you’re the first person in your area to join an MLM. How many rounds of recruiting do you think it would take to max out your earning potential if each new recruit brought on just two additional representatives?”

Cristina replies: “Oh, gosh, I don’t know, It probably depends on the population and a bunch of other stuff, right? It would be easier to recruit more people in a big city.”

Lauren responds: “That’s right. After just 10 rounds, you’d be at 1,023 recruits. By 20 rounds, you’d be over a million – and by 28, the number would encompass every man, woman – and CHILD – in the United States. People need to be really aware of market saturation before they join an MLM. Not everybody will want to join and not everybody will want to buy the products – and people leave all the time.”

32:25

Will asks Question 9: “What would you say is the single most important thing that people can do to protect themselves?”

Lauren responds: “Even though there are legit companies out there, I would say that research is at the top of the list – and I don’t just mean reading a few articles online. Make sure you crunch the numbers and for MLMs, look at the income projections on their websites. With LuLaRoe, less than 3% of distributors make more than $75,000 a year.”

Cristina replies: “I bet a lot of people join because they think they’ll be in that 3%!”

Lauren responds: “Oh, absolutely – and the same is true of pyramid schemes and Ponzi schemes. Americans are hopeful as a rule and I think we want to believe the best of people and of our own abilities.”