Pyramid Scheme Example 1: eAdGear

eAdGear held itself out as a successful internet-marketing company that could help businesses increase their visibility in search results (e.g. Google, Bing). In reality, the Securities & Exchange Commission SEC) alleged, eAdGear did not do much of anything with this service, but rather made most of its $300 million in revenue from investors through a pyramid scheme. According to the SEC, eAdGear recruited “Members” (investors) by promising returns of up to a “thousand dollars a day” or an annual return of “$3.6 million.” One of the main ways “Members” could earn this money was to bring in new Members. The SEC said that the only way eAdGear could pay investors the promised returns was through the solicitation and payment of funds by new investors, a telltale sign of a pyramid scheme.

Wealth Pools Pyramid Scheme

In December 2007, the SEC froze the assets of Wealth Pools International. Wealth Pools claimed to be a marketing company selling English and Spanish language DVDs through a global network of sales associates. New participants purchased a set of DVDs which they would then try to resell for profit. However, participants profited by recruiting new sales associates, and not from DVD sales. The scheme impacted as many as 70,000 people in 64 countries and cost participants $132 million in 2007 alone.

Wealth Pools is an example of a product-based pyramid scheme.

chart showing pyramid scheme example

SEC: Example of How a Pyramid Scheme Operates

Big Co-op Inc. Pyramid Scheme

In April 2010, the owners of the Big Co-op Inc. internet shopping website were found guilty of operating a pyramid scheme in California. Participants purchased a “license,” entitling them to commissions when they sold Big Co-op products to others, including licenses to new participants. Big Co-op claimed that profits were generated by sales of Big Co-op products, and not from selling licenses to new participants. However, almost all profits made by the company came from selling licenses and from monthly dues paid by existing participants. The scheme cost over 1,000 California residents $8.2 million, and the founders each face up to 20 years in jail.

Big Co-op Inc. is an example of a product-based pyramid scheme.

Elite Activity

In 2007, a federal appeals court in Texas confirmed a two-year sentence for Harvey Joseph Dockstader Jr. Dockstader operated a pyramid scheme called Elite Activity which recruited participants to take part in a “cycle of abundance.” In the scheme, participants contributed an initial monetary “gift,” and were promised substantial profits as they recruited new participants. Dockstader convinced participants to join by claiming that his program was inspired by God.

Elite Activity is an example of a naked pyramid scheme.

“Pyramid scheme” becomes catchall for fraudulent conduct

In common usage, people often refer to anything they deem a scam as a “pyramid scheme.” For example, people have referred to various multi-level marketing operations as “pyramid schemes,” but the technical definition requires a pyramid scheme to involve financial fraud. As another example, one Maryland doctor referred to the marketing of the HPV vaccine as a medical/scientific pyramid scheme because the newly-developed inoculation was causing vaccine injury and other side effects.

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