Pyramids, Ponzis and fraud
prevention: lessons from
a case study
Stacie Bosley and Maggie Knorr
Hamline University, Saint Paul, Minnesota, USA
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,
Findings –Findings suggest that this pyramid scheme ﬂourished in counties with identiﬁable afﬁnity
groups: religious communities, Hispanic populations and certain age cohorts (e.g. recently retired).
Recruitment success varied signiﬁcantly between geographic regions, with the highestlevels of recruitment
in the South. While prior research ﬁnds 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 ﬁrst research to analyze national participant-level data from a pyramid
scheme to inform futureaction. While it conﬁrms some past ﬁndings, such as the connection to afﬁnity fraud,
it adds to collectiveknowledge on pyramid schemes and the differences between pyramidand Ponzi fraud.
Keywords Pyramid scheme, Ponzi scheme, Afﬁnity fraud
Paper type Research paper
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 conﬂated 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 ﬁrm that operated from 2001 to
2013. FHTM faced pyramid scheme allegations from six states and the Federal Trade
Journalof Financial Crime
Vol.25 No. 1, 2018
© Emerald Publishing Limited
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