Pyramids, Ponzis and fraud prevention: lessons from a case study
| Date | 02 January 2018 |
| Published date | 02 January 2018 |
| Pages | 81-94 |
| DOI | https://doi.org/10.1108/JFC-10-2016-0062 |
| Author | Stacie Bosley,Maggie Knorr |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
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 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
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 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
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
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