Thursday, September 17, 2009

Pyramid Schemes -- "Main Street Bubble?"

In the opinion of the 10Q Detective, there is no better source to directly educate consumers on identifying and avoiding the deceptive and predatory income traps of multi-level marketing (MLM), pyramid, and Ponzi schemes than Robert L. Fitzpatrick, President of Pyramid Scheme Alert. Responding to our recent analysis on Medifast, “Ultimate Weight-Loss System or Pyramid Scheme,” we offer Mr. Fitzpatrick’s perspective on the financial consequences to self and our economy when the FTC and SEC fail to regulate or enforce existing laws against pyramid scams and Ponzi operators:

“Writing about pyramid schemes and stocks presents a strange dilemma. I have been asked to offer my views to various financial analysts regarding publicly traded pyramid selling schemes. Investors tend to view the pyramid scheme question with ambiguity. On the one hand, they don't want to be investing in a scheme that will collapse. However, given the pyramid's great capacity for rapid "growth", they do want to cash in on the revenue it generates. The issue of inherent fraudulence and harm caused is usually not on the table, only the question of timing for investment.

Pyramid selling schemes transfer money, causing losses to many and profits to a very few, without value being exchanged. In this sense, they cannot be called "businesses."

In the guise of selling products, they leave the victims with products they would not have normally bought, at prices they would never have paid in the open market, and with months or years of wasted time trying to make money from recruiting other
"salespeople." The schemes use the fraudulent "endless chain" proposition, a per se fraud, as their main "selling" tool to induce the purchases and the futile, misdirected and uncompensated marketing work of the "last ones in" (who are 80-95% of the total at all times).

It is sad to me to see that these fraudulent practices, which, by design, concentrate wealth and derail real entrepreneurship, have become imbedded in the economy. When they come to Wall Street, they gain new stakeholders who are betting on cashing in as they rise. They constitute a "Main Street Bubble" of perhaps $15 billion each year, causing losses to about 10 million Americans each year. Today, this bubble, much like our mortgage bubble a few years ago, has a large lobby in DC, in the Direct Selling Association. This Main Street Bubble can sustain itself longer than a Wall Street bubble, as long as it upholds a facade of a "legitimate business" and enough people believe they offer an "opportunity", which currently millions still do. Losses tend to be hidden and so while it causes enormous harm, the structure itself remains intact to continue preying on people (and so, as you noted, continue to reward shareholders.)

China is the only country that has banned them outright and is using the force of the state to keep them out of the economy. In the end, I see them as a self-destructive force in our country, hitting us at the grass roots where maximum damage is inflicted to the heart of the economy. They are sapping wealth, a form of economic cancer. Predators are feeding off the savings or debts of many others. Nothing is being invented, produced. No true growth is occurring and certainly true value is not being exchanged.”

Robert L. FitzPatrick, Pres.


Anonymous said...

The problem with educating people about Pyramid Schemes is that they might understand how the stock market often acts like a pyramid scheme too. And all the big investment banks and many hedge funds in USA are probably dead set against educating US consumers like that.

A lot of ordinary investors once in while pile their money into the stock market just because stock prices keep going up. It has nothing to do with economic fundamentals or company profits. It all depends on unrealistically optimistic stories put out by various self-interested investment professionals.

A good example of that was the dot com boom in the late 1990s, the housing boom after that, and perhaps the present stock market boom.

A lot of people loose a lot of money in these huge pyramid schemes. And it's the professionals who concoct unrealistic but believable stories that make serious money out of it in terms bonuses and capital gains profits.

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