Pyramids, Ponzis and fraud prevention: lessons from a case study

Author:Stacie Bosley, Maggie Knorr
Position:Hamline University, Saint Paul, Minnesota, USA
Pages:81-94
SUMMARY

Purpose This paper aims to empirically identify factors that increase consumer vulnerability to pyramid scheme fraud and compares/contrasts dynamics and implications of pyramid and Ponzi fraud. Design/methodology/approach Statistical techniques, including multiple regression, are used to analyze participant data (with over half a million individuals) from a now-defunct US-based... (see full summary)

 
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Pyramids, Ponzis and fraud
prevention: lessons from
a case study
Stacie Bosley and Maggie Knorr
Hamline University, Saint Paul, Minnesota, USA
Abstract
Purpose This paper aims to empiricallyidentify factors that increase consumer vulnerability to pyramid
scheme fraudand compares/contrasts dynamics and implicationsof pyramid and Ponzi fraud.
Design/methodology/approach Statistical techniques, including multiple regression, are used to
analyze participantdata (with over half a million individuals)from a now-defunct US-based pyramid scheme,
Fortune Hi-TechMarketing.
Findings Findings suggest that this pyramid scheme ourished in counties with identiable afnity
groups: religious communities, Hispanic populations and certain age cohorts (e.g. recently retired).
Recruitment success varied signicantly between geographic regions, with the highestlevels of recruitment
in the South. While prior research nds a possible positive relationship between education and Ponzi
participation,this is not the case in the pyramid scheme studied. Furthermore, while Ponzi schemes might be
pro-cyclical, collapsing during contractions when participants seek to extract their money, this pyramid
scheme exhibitedcounter-cyclical behavior.
Practical implications State and federal regulators,as well as consumer protection advocates, should
learn from analysis of pastpyramid scheme cases. Such analysis informs allocationof scarce resources and
supports the case for targeted, active education. Clarifying differences between Ponzi and pyramid fraud
helps to supportclear and effective intervention.
Originality/value This is the rst research to analyze national participant-level data from a pyramid
scheme to inform futureaction. While it conrms some past ndings, such as the connection to afnity fraud,
it adds to collectiveknowledge on pyramid schemes and the differences between pyramidand Ponzi fraud.
Keywords Pyramid scheme, Ponzi scheme, Afnity fraud
Paper type Research paper
Introduction
Despite vigorous media and regulatory discussionsof pyramid scheme fraud in connection
with companies such as Herbalife International and growing recognition of consumer
vulnerability (Federal Trade Commission, 2016a,2016b), pyramid schemes are rarely
discussed within academicliterature and are often conated with Ponzi schemes. The dearth
of formal research limits academic contributionsto active policy, regulation and prevention
discussions. One reason for limited research might be the complicated practical and legal
environment in which pyramid schemes operate. Another might be lack of access to data
from past cases. Modern pyramid schemes often take the form of multi-level marketing
(MLM) business opportunities. Providing the cover of a proffered product/service, illegal
schemes emphasize recruitment of new sellers and over retail sales (Vander Nat and Keep,
2002). In such situations, the businessopportunity functions as an endless chain recruitment
vehicle, passing paymentsmade by the newest entrants to those further up the pyramid.
Fortune Hi-Tech Marketing(FHTM) was one such MLM rm that operated from 2001 to
2013. FHTM faced pyramid scheme allegations from six states and the Federal Trade
Pyramids,
Ponzis and
fraud
prevention
81
Journalof Financial Crime
Vol.25 No. 1, 2018
pp. 81-94
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-10-2016-0062
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm

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