Here's What Seniors Need to Know About Pyramid Schemes

Key Points

• Scammers want you to believe they're offering you a legitimate money-making opportunity.

• Seniors are seen as prime targets due to the potential that they have money saved for retirement.

• If an organization generates more money from new recruits than from outside sales, it's probably a pyramid scheme.

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Pyramid schemes are nothing new. For example, in the 1920s, Charles Ponzi promised investors high returns on postal reply coupons, using the money from new investors to pay returns to earlier investors. Like all pyramid schemes, Ponzi's collapsed in a heap.

Because scam artists will do anything they can to separate their victims from their savings, it's vital that seniors understand that they're prime targets. More importantly, seniors must know how to spot and avoid pyramid schemes.

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Prime targets

If you've spent years strategizing how you'll retire, scammers consider you a prime target. While they might not be able to con a 21-year-old out of much, they suspect you have plenty of money put away. It may be someone you meet in the park, bowling, or even at church. The scammer may be someone you've never heard of, someone who contacts you out of the blue, or someone who's introduced to you by a friend.

The point is that pyramid schemes and the scammers who operate them see you as a rich source of cash.

Packaged to look like something else

Trying to sell you on a pyramid scheme involves making you believe you're getting involved in a legitimate pursuit, like a business venture. One only needs to look at Charles Ponzi's 1920s scam to understand how pyramid schemes work.

Ponzi, once known as a financial wizard, convinced well-meaning investors that he'd found a way to make huge profits by buying international postal reply coupons in countries with weakened currencies and selling them at a higher price in the U.S. Ponzi said he was so confident that he promised a 50% return in 90 days.

This was the "Roaring Twenties," a decade of economic prosperity in the U.S., and many wanted in on the action. The problem with Ponzi's plan was this: The only people who experienced a payday were those who got in early. The money from those who bought into Ponzi's scheme later was used to pay the people on board early.

It's the same with today's pyramid schemes. No matter what's promised, only a few will profit and the scheme will eventually collapse, leaving most participants holding the bag. As simple as a pyramid scheme seems, it can suck anyone in, from a new investor to someone who's been investing for decades.

Red flags

If someone invites you to invest in a new business or one-of-a-kind product, or become part of a multi-level marketing (MLM) enterprise, here's how you can determine if it's actually a pyramid scheme:

• More money paid for recruiting others than for product sales. If the program requires you to recruit others to join for a fee, it's likely a pyramid scheme.
• No genuine products or services sold. According to Investor.gov, fraudsters claim you'll sell "products," like online advertising, websites, tech services, or mass-licensed e-books. They're creating "businesses" that are hard to value to hide the fact that they're pyramids.
• Promise of high returns. A scammer will promise you fast cash to get their hands on your Social Security, pension, annuity, and other assets. If you see a return, it's typically paid out of money from new recruits rather than actual sales.
• Promise of passive income. If you're offered payment in exchange for doing very little, like placing online advertisements on obscure websites or recruiting others, it's probably a pyramid scheme.
• There is little or no revenue from retail sales. If you look at documents, such as financial statements audited by a certified public accountant (CPA), and those documents show income primarily from recruiting new members, it's a serious red flag.
• Complex commission structure. Legitimate companies pay commission based on products or services you sell to people outside the program. Be careful if the commission structure is too complex to be easily understood.

Protect yourself

Fortunately, once you know the signs, you're in an excellent position to protect your interests. Here's how:

• Be skeptical. If an investment or work-from-home offer sounds too good to be true, it probably is.
• Ensure sales generate income. Verify that you'll earn money from legitimate retail sales, not just recruitment fees.
• Investigate the company. Go online to read about others' experiences.

Finally, check with the Better Business Bureau (BBB) and your state's Attorney General to learn if the company is legitimate and whether there have been complaints. Don't allow anyone to steal the retirement you've planned for so long.

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