How Pyramid Schemes and Ponzi Schemes are Prosecuted in the US: Do You Know Koscot Test and Howey Test?

Introduction

As an outsider to the network marketing industry, I have observed it for a number of years, and it has been my experience that MOST people in the industry (except MLM lawyers, and a few critics and proponents) have NO IDEA about what constitutes a pseudo-MLM scam, how closely they resemble MLM, and thus, have no idea when they manage to hit a scam instead of a legitimate business.

Thus, this hub will attempt to trace a short history of pyramid scheme, Ponzi scheme, and network marketing, as well as a few significant cases in the history of network marketing, to illustrate the actual case laws involved, the jurisdiction, and so on on and so forth.


Ponzi schemes, Pyramid Schemes, and Hybrids

Ponzi schemes and Pyramid schemes have many variations, and it will take many books to explain all the variations. They can even be combined into hybrid (chimera?) versions.

Thus, instead of explaining both in detail, I'll just explain to you who primarily prosecutes Ponzi schemes, pyramid schemes, and what sort of test would they use based on legal cases.

A Ponzi or pyramid scheme can be busted several ways:

  • Action by Federal Trade Commission (FTC) for consumer fraud
  • Action by Security Exchange Commission (SEC) for securities fraud
  • Action by State Attorney General for fraud
  • Action by US Attorney for fraud
  • Action by local prosecutors for fraud

Action could be as simple as "cease and desist order", "consent order", settlement, fine, to full-scale asset freeze, raid of offices, arrest and prosecution of top executives, involving wide variety of Federal and State legislation.

Keep in mind most pyramid schemes and Ponzi schemes simply collapse and/or disappear before the perp can be sued and prosecuted. They rarely get big enough to be noticed by law enforcement.


Charles Ponzi and the "Ponzi Scheme"

You can read more about Charles Ponzi on Wikipedia, but here's a quick summary.

In 1918, Charles Ponzi had an idea about exploiting International Reply Coupon, which is supposed to be equivalent across the world as postage, yet cost different in different countries. He believed that by using that as an a currency of sorts, he can buy some in one place (where it's cheaper), sell them in another (where it cost more), and pocket the difference. In the modern world this is known as "arbitrage", and is the foundation of modern "foreign exchange", or "forex" trading.

In reality, he just took in the money, and live off of it, and paid off a few early investors with the money from the latecomers. They in turn told everybody else, who basically flooded him with money. He bought out a small bank, and as he got bigger and bigger, he attracted attention of the various people in the city, including US Attorney, local Newspaper, Bank officials, etc. US Attorney forced an audit of his account, local newspaper posed serious questions on the impossibility of the scheme (there's not enough international reply coupons in circulation to account for the money Ponzi now holds), and even the state bank commissioner starting watching him.

Several times investors demanded their money back, starting a "run", and Ponzi each time managed to hold back the tide by paying out the loudest individuals while serving coffee and donuts and such to the mass of people waiting outside, eventually convincing them to leave their money with him.

Ponzi's scheme eventually crashed when the Massachusetts bank commissioner froze the bank assets when the auditors estimated that the bank itself is overdrawn (Ponzi had controlling interest in the bank and was lending money to himself). Audit shows Ponzi is 7 million dollars in debt, and his PR agent found documents that Ponzi is "robbing Peter to pay Paul". The local newspaper also found Ponzi's prior "check forging" prison stint in Montreal over a decade ago, and the US Attorney ordered his arrest.

Total loss was estimated at 20 million dollars (then, about 225 million in 2011 dollars). Several smaller banks were wiped out.

A couple points to take away:

  • There was no Federal or local agency specifically tackling financial fraud
  • The scheme was broken by newspaper "The Post" and some help from the banks
  • The authorities (Attorney General, US Attorney) had little to go on and was only FORCED to move by the newspaper's coverage and investigations.
  • The critics were not believed until it appeared in newspapers
  • Ponzi is a very smooth talker and looked very good and polished.

As a result of this fraud, a Federal level agency to deal with fraudulent financial activities was eventually created.


FTC vs. Pyramid Schemes

In the US, pyramid schemes, at least large scale ones that cross multiple state borders, are usually handled by the "Federal Trade Commission", whose mission is to protect all US consumers against unfair and fraudulent trade practices. And pyramid scheme is certainly one of them.

FTC was created in 1914 under the FTC Act, and signed into law by President Woodrow Wilson. Though it previously existed as "Bureau of Corporations" created by President Theodore Roosevelt in 1903. The BoC was partly created to break up the huge "Trusts" that are essentially cartels of manufacturers who collude to fix prices and destroy competition. It was known as "trust-busting".

FTC also handled securities and investments until Security Exchange Commission was created in 1933 under the Securities Act and responsibilities were handed over.

FTC in the 1940s sued garment and textile makers of anti-competitiveness when they formed a cartel to discourage competition among members by "fining" members for "copying" designs from each other. The relatively low-key activities continued into the 1960s, when it issued the Cigarette report detailing the harmful effects of smoking. It was pretty lame and lambasted by its critics, including Ralph Nader, and President Nixon ordered the FTC to be reorganized.

FTC is most famously known for going after variety of pyramid schemes which proliferated in the 1970s. Most people in Network Marketing are aware of "FTC vs. Amway" (1979), but few people remember the really landmark case: " FTC vs. Koscot Interplanetary" (1975).


FTC vs. Koscot Interplanetary (1975) and the "Koscot Test"

FTC sued "Koscot Interplanetary", which was one of Glenn W. Turner's companies. Mr. Turner, who calls himself "Mr. Enthusiasm", started Koscot Interplanetary to sell cosmetics just like Avon. The problem with Koscot is it doesn't encourage sales of cosmetics, but rather, simply more positions in the company.

Koscot works as follows: To join Koscot, you pay $2000 to become a supervisor (or higher levels), and you buy $5400 worth of cosmetics. And you make money ($700) by encouraging others to buy in (at Supervisor, for $2000) just like they did. Essentially, Ksocot "supervisor" bought two things: 1) "the right to sell a product", 2) "the right to receive, in return for recruiting other participants into the program, rewards which are unrelated to sale of the product to ultimate users. (emphasis added)"

Koscot lost the lawsuit, and the definition FTC created for pyramid scheme became known as the "Koscot Test" (for pyramid schemes). It can be roughly summarized as follows:

  1. The participant makes a payment of money to the company;
  2. In exchange, the participant receives the right to sell a product (or service);
  3. In exchange, the participant receives compensation for recruiting others into the program;
  4. The compensation is unrelated to the sale of products (or services) to the ultimate user.

To be judged a pyramid scheme, the scheme must have all four elements.

Koscot lost because the Koscot paid participants simply for recruiting more participants, thus fitting all four parts of the definition of pyramid scheme.


SEC vs. Unregistered Securities

Securities Exchange Commission, i.e. the SEC, was established in 1933/1934 through the Securities Act and Securities Exchange Act, and took over supervision of investments from the FTC, leaving FTC to do trade and commerce. The law generally requires a uniform set of disclosure about the investments, so people can make informed choices.

SEC mainly deals with stocks, bonds, and commodities, the typical investments. However, its role expanded in 1946, when it sued W.J. Howey company when it held that "land sales and service contract" can also be considered "investment contract", i.e. "securities". This became known as the "Howey Test", where it expanded on what could be considered an "investment contract".


SEC vs. W.J. Howey Company (1946) and the "Howey Test"

W.J. Howey owned large tracts of orange groves in Florida. To obtain money for further development, Howey sold "land and service contracts", where the buyer can buy lots, but have virtually no rights (not even right of entry or right to stuff on the land), then lease it back to Howey, and be paid annual profit from the farming activities being done on it. It is marketed to business people and regular city folks who has no experience nor desire to farm, essentially as an investment.

SEC sued Howey and company and filed for an injunction barring Howey from advertising as Howey had not registered with SEC as an investment. The motion was denied by district court, affirmed by Federal court of Appeals, and reached all the way to Supreme Court, where justice Frank Murphy created the four point test, later known as the "Howey Test".

An investment contract has four elements:

  1. investment of money due to
  2. an expectation of profits arising from
  3. a common enterprise
  4. which depends solely on the efforts of a promoter or third party

This basically confirmed SEC's role to sue investments that are deceptively presented as non-investments. Though few would expect the SEC to sue a MLM in 1973...


SEC vs. Glenn W. Turner (1973)

SEC sued Glen W. Turner in 1973, two years BEFORE FTC sued Koscot (one of Glen W. Turner's companies) for selling an unregistered investment contract.

Turner had a program called "Dare to be Great", where you buy "adventures" (actually sales courses) at $100, $300, $700, $1000, $2000, or $5000. You receive a cassette player and a dozen different cassette tapes that teaches you how to sell, some group session tickets, and in some packages, a workbook and instructions book. You then recruit people to attend "adventure meetings", where you try to get them to buy the adventures as well. The more and higher level adventures you convince people to buy, the more pay you get.

SEC convinced the court that the $1000, $2000, and $5000 adventures are indeed "investment contracts" (as per the Howey test above) and thus they are not registered with the SEC, indeed, disguised as NOT investment, thus engaged in deliberate securities fraud.

Turner's main defense is against key (4): "solely from the efforts of others". He claimed that because his participants are required to recruit people to attend adventure meetings, they need to exert effort, and thus, it does NOT fit (4). His explanation was rejected, as the Ninth Court of Appeals ruled that they consider only managerial level efforts to be a real counter to part (4). In other words, "recruiting" is not considered to be a "significant" managerial level activity when it comes to the Howey test part 4 to warrant an exception.

This case is significant because Dare to be Great was marketed as income opportunities, not "investment".

The points to take away:

  • Any significant amount of money put into the company, other than for some at-cost materials with refund policy, may be considered an "investment". Clearly, $1000 + for a tape player and a couple tapes is excessive. The modern equivalent would be a MP3 player with preloaded audio tracks (worth about $10?) for $500.
  • Court interprets "solely" rather loosely. Only managerial efforts, not "busy work", are considered as exceptions to the Howey Test Part 4.

This gave the authorities a new tool to fight pyramid schemes and Ponzi schemes.


"The Amway Safeguard Rules" (1979)

FTC sued Amway in 1979 for making fraudulent claims of income possibilities, as well as being a pyramid scheme similar to the Koscot Interplanetary case.

At the time, Amway works as follows: each distributor (who bought a small at-cost sales kit) purchased household products at wholesale from the person who recruited or "sponsored" her. The top distributors purchased from Amway itself. A distributor earned money from retail sales by pocketing the difference between the wholesale price at which she purchased the product, and the retail price at which she sold it. She also received a monthly bonus based on the total amount of Amway products that she purchased for resale to both consumers and to her sponsored distributors

FTC and Amway eventually reached a compromise that defined a clear difference between a pyramid scheme and multi-level marketing. Specifically, Amway does NOT pay on recruiting people, but rather, only pay on sales of goods (in this case, sold indirectly, by "sponsored distributors"). Furthermore, Amway has several "safeguard rules" in place to prevent the "sponsor" from "inventory loading", i.e. encouraging the "sponsored distributors" (downlines) to buy up so much inventory that they cannot hope to sell in reasonable amount of time, just to drive up the sponsor's own compensation. These three rules became the "Amway Safeguard Rules", or just "Amway rules". They are:

  1. Buyback rule -- sponsors are required to buy back the inventory that their distributors cannot sell (within reasonable amount of time, of course)
  2. 70% rule -- distributors (either sponsor or sponsee) are required to sell at least 70% of their inventory every month before they can order more
  3. 10 customer rule -- each distributor is required to make one retail sale (or more) to 10 different retail customers every month

With these safeguards in place, inventory loading is discouraged, and thus, FTC conceded that Amway does NOT fit part 4 of the Koscot Test, and thus is NOT a pyramid scheme.


Webster vs. Omnitrition (1996) aka the "Omnitrition Case"

In 1996, Webster, a former Omnitrition rep, sued Ominitrition for being a fraudulent business / pyramid scheme. The Ninth Circuit Court of Appeals ruled that even if a business followed the Amway rules, it can STILL BE ILLEGAL, esp. if the rules are not enforced.

According to the ruling, Ominitrition reps are paid for the amount of products they themselves have purchased, not for the amount of retail sales made. For example, if you bought $1000 worth of products that month, you are paid a bonus based on $1000 purchase of that month, no matter how much of that $1000 worth of products you have sold. This, according to the court does NOT satisfy part 4 of the Koscot Test (see above). Their reasoning is that Amway rules, specifically the 70% rule and 10 customer rule, are meaningless unless the sales are actually retail. And paying participants on non-retail activity is NOT satisfying Koscot Test part 4. Omnitrition produced signed agreements from all the reps saying they will follow the Amway rules, but audit shows that the rules are almost NEVER followed, and the company had never checked up on whether the rules were enforced. The court also found that Omnitrition has a buyback policy (90% of inventory within 3 months), but few if any sponsors seem to have ever bought back inventory.

Note that this is a CLARIFICATION of Koscot Test, not a modification. Selling to participant is NOT considered "retail sales".

Some have interpreted this decision in different ways. One interpretation says "Ultimate consumer" means someone who is NOT in the company and not participating in the compensation plan. This is not a popular interpretation among network marketers as this seem to ban "self-consumption", where the individual participants order some products for personal use, not for resale. Nonetheless, MLM attorneys such as Grimes and Reese LLP warns all MLMs to take this very seriously lest they want to be challenged in court by the FTC.

Points to take away:

  • Company must compensate participants on RETAIL SALES, not "sold to participant"
  • Amway safeguard rules must be enforced, else it cannot protect the company


SEC vs. Bernard Madoff

Bernard Madoff was a legend in Wall Street. Started with $5000 he had saved during jobs, in 1960, using his father's influence to gain some clients, Madoff pioneered the use of computers to facilitate trading, which later lead to creation of NASDAQ stock exchange. He later served as head of board of NASDAQ for several years. By 1980s and early 1990s their computer system was so efficient they are PAYING other firms to execute their trade orders (and pocketing the difference, if any, as profit). Madoff Securities were trading up to 15% of New York Stock Exchange (NYSE) daily volume by year 2000, and has assets totalling about 300 million.

Madoff later, in his confession, said he actually stopped trading in mid 1990s, though some suspected he actually stopped trading much much earlier, perhaps in the 1970s. At least one book claimed Madoff, very early on, made a horrible trade, lost a TON of client money, then instead of coming clean, he borrowed money and covered it up.

Madoff marketed to an exclusive clientele, mostly Jewish upper-class, and the very rich, including many charitable organizations. Several newspapers, when the Ponzi scheme was publicized, called it an affinity Ponzi, in reference to the affinity scam where race and/or religion is used to get closer to the victims.

Madoff's investment methods were closely guarded and reportedly "too complicated for normal people to understand". Even when suspicions arose, people were reluctant to take their money because they are afraid they won't be able to get back in later should it prove to be a false alarm. Madoff kept the returns very modest... 10% or so, but extremely consistent year after year, even on horrible economic times.

SEC and other regulatory agencies had investigated Madoff Securities at least 8 times over 16 years prior to the Ponzi's formal discovery in 2008, but each time, either found no wrongdoing or had no conclusions.

Outside critics have repeatedly raised questions about Madoff Securities since 2000, but was repeatedly ignored, even by Wall Street Journal, who decided NOT to publish a piece questioning Madoff's operation in 2005. However, other critics have tried to replicate his methods, and cannot, and other irregularities, such as having close relatives in the SEC as well as on various governing boards and regulatory agencies, having a two-person accounting firm as his auditor (for billions of dollars?) and so on and so forth lead others to cast further suspicions on his company.

Madoff's end came in December 2008. In the previous months, the economic downturn have forced many clients to withdrawn their funds from Madoff, to the tune of BILLIONS of dollars. In the final weeks, Madoff was busy out searching for more funds, including funds from his "international branch", from close family friends, and so on and so forth. He also pitched his fund to other financiers, but was rejected. On December 10th, Madoff suggested to his sons that they should pay out the bonus 2 months early to the tune of 170 million dollars. The two sons, Mark and Andrew, knew the firm has some problems, asked Bernard why, when Bernard Madoff reportedly admitted to them that the asset management arm of Madoff Securities was actually a Ponzi scheme all along. The brothers, realizing the enormity of the crime, called their lawyer, who then informed the SEC, and the SEC notified the FBI.

FBI agent visited Madoff residence on December 11, 2008, where Bernard Madoff confessed to running a Ponzi scheme. He was taken into custody, then posted 10 million dollar bond and released to be confined to his home with electronic monitoring.

In March 2009, Bernard Madoff was brought to court and calmly admitted to running the largest Ponzi scheme in US history, to the tune of 50 billion dollars. The figure was later revised to 70 billion, and eventually Madoff was given the maximum sentence, 150 years.

SEC spent months going through its own actions and in 2009 produced a 477 page report detailing its own failures on why they did not spot any of the red flags that should have shown Madoff Securities as a Ponzi scheme. Eight employees were disciplined, though none were fired.

Points to take away:

  • Just because the head honcho is famous does NOT mean he's legitimate
  • Just because the head honcho had been around for long time does NOT mean he's legitimate
  • Just because the government had investigated doesn't mean it's legitimate


SEC and more vs. Ad Surf Daily (2008)

On August 5th, 2008, Business Week published a headline: Scams have gone Web 2.0. Secret Service, SEC, IRS, and local authorities raided a business in Quincy, Florida called "Ad Surf Daily", and froze all its assets to the tune of 55 million dollars. The reason: it's a Ponzi scheme.

Ad Surf Daily operates as follows: they advertise (as early as 2006) via Youtube videos and websites claiming that you can buy advertisements on their "network", and earn a lot of money watching and clicking ads. Participants are known as advertisers, and purchase "ad units". "Advertisers" can "earn income" by watching and clicking on the ads, and refer other "advertisers". The income is totaled daily as "rebates" up to 8% (according to indictment). The more ad units you have, the more rebates you get. You can repurchase ad units with your rebates, which means you get more rebates in the future. You don't even need a business to participate. Just buy ad units any way and Andy has two businesses he'll let you promote!

SEC charged the owner "Andy" Bowdoin of running Ad Surf Daily as a Ponzi scheme. SEC had previously shut down "12dailyPro" Ponzi scheme, of which Bowdoin was a member. One month later Bowdoin started Ad Surf Daily. Bowdoin structured Ad Surf Daily to avoid many of the triggers that caused SEC to shut down 12dailyPro, including avoiding the words 'investment' and 'return', as well as never promise a fixed rate of return. Nonetheless, when Bowdoin paid a member to review the business model, Bowdoin was told that he's operating a Ponzi scheme. Bowdoin reacted by giving full refund to this member in return for him to NOT report to the authorities, and made a very minor revision... cap the return at 125%.

In 2007, Bowdoin hired an Internet Marketer who helped produce a video, starring Bowdoin claiming that the business had multiple sources of income, and is not a Ponzi scheme, and even had an attorney appear in the video proclaiming the same. In 2008 Bowdoin appeared in various rallies (promotional seminar) around the country recruiting even more people, and had members making their own videos touting how much money they made and how easy it was.

As a result of the raid in August 2008, Federal prosecutors hit Andy Bowdoin with 7 counts of violating Federal laws, including wire fraud, securities fraud, and selling unregistered securities. Asset forfeiture unit was called in and froze all of ASD accounts, and in 2010 55 million (most of the remaining funds) were remitted to the participants through a court trustee.

Andy Bowdoin himself was arrested in 2010, bailed out, joined another alleged Ponzi scheme called OneX, claiming this will make him plenty of money to defend himself against the government's case, only to suddenly plea guilty in May 2012. He was processed into a Florida Federal detention facility in 2013.

Federal spokesman said that most people were taken by the slick sales pitch and the "success stories", as most people's "due diligence" consist of studying the first page of Google results.

Points to note:

  • Sales rallies are NOT to be relied upon
  • Google search is NOT due diligence
  • Don't believe a sales pitch 100%, even one "confirmed" by a "lawyer"
  • When it doesn't make sense, it is probably a scam


FTC vs. Burnlounge (2007)

FTC filed a temporary restraining order against Burnlounge in June 2007, alleging that Burnlounge is in effect a pyramid scheme where participants are paid far more to recruit new participants than to sell music, its alleged business model. According to the FTC complaint, Burnlounge started in 2005. Burnlounge pays $50 if you recruit 2 participants, and 50 cents if you sell two songs. You can guess which one people will do more! (Actually Burnlounge has a multiple of packages, from $50 to 500 to join, and monthly fees)

Burnlounge actually won the first round when the TRO was denied, but quickly got rid of its MLM plan completely and went to a single level commission plan. However, FTC is not done yet. FTC took the unusual step of suing both the top execs of Burnlounge as well as two of their top recruiters. The lawsuit dragged on as one person settled out of court, while others chose to fight on. However, the company itself is done, 40 million invested have largely evaporated.

In March 2012, the top execs as well as the 2 top recruiters are ordered to pay back $17 million dollars.

What are you supposed to learn from this?

  • Just because it sounds right doesn't mean it's right. (Online music sales sounds reasonable!)
  • The compensation package demonstrates what's the emphasis of the business, not the slick sales pitch or the "alleged" business model
  • If the business rewards much more for introducing people into the scheme, it's a pyramid scheme (or will be regarded as one)
  • The top recruiters can be sued in a pyramid scheme, not just company execs


California vs. Your Travel Biz (YTB) (2008)

In August 2008, California Attorney General Jerry Brown sued Your Travel Biz, better known as YTB, as a pyramid scheme and illegal business opportunity.

YTB is supposed to be an online travel seller where individuals can buy a website for $500 that allows one to sell travel by paying a monthly fee of about $50. The company paid commission for introducing more people to join YTB (i.e. buy websites). People found that typical travel sales made very little money: a few dollars per ticket, at best. Most resorted to recruiting to make back their "investment".

AG Brown alleged that YTB is a huge pyramid scheme that enriched those at the top, as less than a hundred people earn good income (well over 100000, some earned over a million), while median income for participant in 2007 is $39, not even enough to pay for one month's website "maintenance". YTB settled out of court in 2009, agreeing to restructuring, make some promotional changes, deleted the referral commission business model, and paid 1 million in fines.

The investigation also triggered similar investigations in Illinois and Rhode Island.

YTB later renamed itself Zamzuu, but that didn't help its fortunes much. YTB formally filed chapter 11 bankruptcy in March 2013, ending this chapter.


Multiple States and FTC vs. FHTM (2010,2013)

Fortune Hi-tech Marketing, better known as FHTM, supposedly sells everything, from appliances to phones and everything in between. However, a study of the compensation model shows that most of the income is from recruiting. According to the video below, recruiting pays hundreds, while "residuals" from things sold paid pennies. Thus it is mainly a pyramid scheme.

FHTM was sued by multiple states, including Montana, North Dakota, Texas, and more, and agreed to pay millions in fines and not to do business in those states. Furthermore, many companies, whom FHTM claimed to represent (GE Authorized Dealer, DISH network partner, etc.) denied ANY involvement with FHTM except as "third-party affiliate".

FHTM made the news when the name of Ken Lewis, ex-CEO of Bank of America, was named a member! Turns out his wife was recruited by one of her friends into it as a favor.

The company blames a few rogue reps who "don't understand the model".

In January 2013, surprise raid by FTC and 3 different state attorneys general closed FHTM and put the entire company in receivership.

http://www.usatoday.com/story/money/personalfinance/2013/01/28/fhtm-shut-down-pyramid-scheme/1870527/

State of Georgia vs. TVI Express (2010)

TVI Express launched in India in 2009, and was never clear on what it is supposed to be. On one page it says it sells travel, on another page it sells income opportunity. It claims to be based in the UK, and reached China by March 2009, only to be banned a few months later as a pyramid scheme. Local bloggers documented how the company is just a relabeled Travelocity website and all the alleged backing is completely fake.

TVI Express claims to sell travel, but in its compensation package it only requires you to recruit. Pay $250 USD (plus misc. fees) to join the "traveler board" which is a 2x3 matrix. When you fill the matrix, you get $500 USD and move onto "express board", another 2x3 matrix. When you fill that matrix as well, you get $10000 USD. You don't need to sell any travel at all. Indeed, for 2 years, its own FAQ states that "You don't need to sell any products." It is a very obvious pyramid scheme.

The language barrier apparently prevented other countries from realizing that the scheme was already outlawed in China, as it then spread to various other continents, including the Americas, Africa, Europe, Australia, and more. The scheme reached US in early 2010, and many so-called MLM coaches and reviewers were touting it as the best thing since sliced bread.

It all came crashing down when State of Georgia issued a "cease and desist" against the local reps, known as "TVI North America", in September 2010. The order gave 21 days to appeal. Apparently TVI North America notified TVI Express headquarters right away, but have received no reply, thus the injunction became permanent. Thus ended TVI Express scam in the US (though several reps continue to blame their downlines and "anti-MLM attitude" in the US).

Australia have recently convicted their "leaders" of TVI Express scam in late 2011 and fined them $200000 recently. The scam was also shut down in Indonesia, South Africa, and various other countries, though it simply moved on to some other countries. Some members continued to deny that TVI Express was a scam.

In April 2013, news came that the mastermind behind TVI Express, Tarun Trikha, had been taken into custody by Indian CID while transiting through Delhi airport.


What to do if you have been scammed?

First, get all documentation. Print a copy of the website, download a copy of the recruitment video, so on and so forth. Note numbers, names, and more. If you have alleged income, or promise of income, print the screen and so on. You need to document EVERYTHING, sales brochures, filmed presentations, seminar slides, etc.

Second, write up a complaint, that explains why you are complaining, and include all the evidence you think proves your point, and WHY they do so.

Third, send your stuff to the relevant people. Local US attorney, state attorney general's office, SEC if it's more of a Ponzi and FTC if it's more of a pyramid (though as you saw above, they can mix).

Fourth, send a copy to local TV station's consumer reporter or investigative reporter, esp. if the suspect scam has held local meetings and/or have a lot of local members.


Conclusion

Pyramid schemes and Ponzi schemes are a target for law enforcement, and these are some of the more significant cases. However, keep in mind that in almost all cases, hand of justice moves slowly. Often it will take the authorities several months to well over a year or two to shut down the alleged scheme.

Most schemes are too small to attract this sort of attention, but once they do, the various states join in, at least those with deeper pockets, like California, Texas, and so on.

The government only react to scams, and you may not get your money back, unless it was a huge scam that involved a lot of money. And even then it may take well over a year.

It is better to NOT fall victim to a scam in the first place.

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Comments 24 comments

Bellicose Philodox 4 years ago

What happened to your Zeek Rewards post? It's a shame its gone.


kschang profile image

kschang 4 years ago from San Francisco, CA, USA Author

Some guy, who may have over-reached, filed a "takedown" notice claiming copyright infringement among other bogus claims. While it is being investigated the hub is offline.


fhtmfacts 4 years ago from Santa Rosa, California

FHTM graduates from Pyramid Fraud to attempted murder!!!

It is so incomprehensible to understand how a company (Fortune Hi-Tech Marketing) that claims its mere existence is to help as many as possible, with help of the church, can also be so obnoxiously arrogant to believe they can manipulate the justice system to a point where they can push someone to death. After exposing the truth about Fortune Hi-Tech Marketing (FHTM) the whistleblower was sued in an attempt to shut him up and stifle his rights to freedom of speech.

“If the fate of your business model rests at the hands of one individual, (not me) to the extent that you have to spend millions of dollars to try to shut him up then the system is just fatally flawed. Fix the PROBLEM not the SYMPTOM. This is all just a side effect of what you have created. I don’t see the worst of the worst companies out there that act like this or have to put up with this nonsense. What’s the common denominator? Stop acting like 3rd graders and run a business for once”, says Rob Jenkins.

Not only are they arrogant enough to think they have to the right to destroy Mr. Isaacs financially, but they continue, to this day, the harassment and intentional lies to the Federal courts and American Arbitration Association until he was on his deathbed almost gone. Their briefs and motions totally elude any factual statements and are based on unsubstantiated speculation and outright falsities, just like the foundation of their business since 2001. For 10 years they have claimed partnerships with Fortune 500 companies, being 100% debt free, solid enterprise and a money making franchise opportunity.

When you peel the outside off of this lemon one discovers the bitterness and the exact opposite is true. Multiple AG’s have investigated, prosecuted and/or fined them for operating an illegal pyramid fraud. They are also on the FTC Operations Empty Promises list of companies being investigated for illegal activities. During the settlement with Texas AG in 2011 they claimed to not have enough money to pay back the 1+ Million in restitution yet they have found the funds to persecute the whistleblower that brought it all to light.

FHTM has not only engaged in a malicious prosecution since the very beginning but they have had their representatives call and threaten Mr. Isaacs life. Filing a trademark violation case for using the world “Fortune” which they knew was owned by Time Magazine, and not them, was just a way to take advantage of the system by someone with more money that the poor defendant had. The ex- FHTM general counsel, Judy Hammerschmidt, who was not even licensed to practice law in Kentucky, during her tenure with FHTM, has displayed a great deal of malice and wrongful intent. Her attempts at intimidation as their general counsel were hilarious considering the fact that she was acting as a lawyer illegally. She has since been reprimanded by the Kentucky Bar Association. No evidence existed or exists to back any of their claims. If FHTM had a case with legal merit they would have never agreed to a settlement and dismissal in June 2011. They didn’t win anything as they have rumored through the ranks of their cult-like followers.

FHTM continues to purposefully engage in behavior that is extreme and outrageous which is intended to cause severe mental anguish and they should be penalized for the intentional infliction of emotional distress. The FHTM attorneys, who are milking their cash-cow client, have outright said that they will not be satisfied until Mr. Isaacs is homeless, without family, living on welfare in a cardboard box under a bridge somewhere. Their intention is not to get at the truth but instead to bankrupt Mr. Isaacs.

One year ago, in June 2011 a settlement agreement was negotiated, which was intended to eliminate the proceeding, unbelievable financial and emotional stress and put the issues to rest forever. The agreement was entered into under false pretenses and with great malice as during the last year they have done everything possible to continue the manipulation of the judicial system in an effort to stall or delay its finalization.

Mr. Isaacs took a sabbatical since the settlement in June 2011. He has given no further media interviews, no television appearances, no AG complaints and no internet blogging. It doesn’t matter if he discusses FHTM or not. The FHTM legal team is so bent on blaming Mr. Isaacs for every negative comment or complaint made against them anywhere that they are blinded by the fact that others despise them as well of not more than he ever did. They have made Mr. Isaacs the poster child for not going against their cult and fraudulent business model. Bernie Madoff ran his Ponzi scheme for thirty years before being shut down. If FHTM spent as much time fixing their lies to act more like a real business then they wouldn’t need to continue to harass and destroy anyone.

Their continued malicious prosecution and harassment resulted in Mr. Isaacs stress level hitting the roof in August 2011 causing a major life threatening heart attack. He underwent two major surgeries inside of a month to save his life. Doctor’s orders were to eliminate anything stressful in my life including the FHTM litigation and work. He was forced into retirement and has been going broke as a direct result of the litigation by FHTM in their attempt to kill him literally. It is like they smelled the blood and won’t let up till Mr. Isaacs is gone from the face of the earth permanently.

Who in their sane mind would ever think that such a supposedly respectable company, run by the “King of MLM” – Paul Orberson, would spend all of their resources on attempted murder? Their intentions are clear - don’t rest until Mr. Isaacs is dead and gone.


kschang profile image

kschang 4 years ago from San Francisco, CA, USA Author

@fhtmfacts -- Mr. Isaac's hands ain't exactly clean. He was a pretty good FHTM rep and decided make some sales tools for the reps and used the FHTM name without permission. When FHTM came after him he turned sides. While this really has no effect on the question "Is FHTM a pyramid scheme", it adds a certain bias to everything what Mr. Isaacs did that it must be accounted for (same for anything FHTM does).

It turns out that whoever went after Mr. Isaacs is now helping helping ZeekRewards. Coincidence? If Mr. Isaacs want to document what he knows about Robert Craddock and/or Greg Caldwell, he's welcome to share it anonymously via anonfiles.com


fhtmfacts 4 years ago from Santa Rosa, California

Mr. Isaacs never used the FHTM name on a commercial venture. He used the name "fortune" which is NOT owned by FHTM. They dropped the stupid lawsuit against Mr. Isaacs because they had zero evidence that he had done anything wrong. It was all bullshit to get him to stop telling the truth about the FHTM Ponzi Scheme. :)


kschang profile image

kschang 4 years ago from San Francisco, CA, USA Author

@FHTMfacts -- Maybe you should write Mr. Isaac's version of the events on what transpired. :) I can always link to it.


Sanxuary 3 years ago

Good information but actually this is how we persecute Ponzi Schemes. First we pay off or elect a politician to create a loop hole. Then you take lower level employees to blame later and have them do the dirty work. Then you commit tons of fraud until you need a Government bail out. You then fire that CEO after giving him a huge bonus and make him a Lobbyist or the next Politician. I can not wait until God gets these people, what fun that is going to be.


kschang profile image

kschang 3 years ago from San Francisco, CA, USA Author

That's generic fraud, hardly a Ponzi or pyramid scheme.


Sanxuary 3 years ago

Really what's the difference? Paying zero taxes and putting it in off shore accounts is not tax evasion either? Just because you have the money to cheat the system does not make you any less of a thief. Its not about money to the average person but principal. If we go to jail and pay every dime in taxes why are they not criminals? Why is this not a social injustice? They were educated and use are infrastructure every day why should they not pay like us?


kschang profile image

kschang 3 years ago from San Francisco, CA, USA Author

The difference is one is working within the rules (and can be dealt with by outlawing the loopholes later), and the other is outright fraud (already against the law).

Sure they are social injustices, but one's "legal" (but immoral), the other is BOTH illegal AND immoral.

Furthermore, there are people who's out to exploit the rules in everything by going up right against the line. Are they immoral by pushing the boundaries?

And we're going WAY off topic. :)


Sanxuary 3 years ago

Its not off topic because bending the rules opened all the loop holes for the criminals that were worst then the so called legal ones. I call it Pyrrhic justice. Unfortunately it screwed a lot of people who got caught up in its to good to be true. None the less Enron was legal, and to big to fail was good enough to become to big to prosecute. I guess at a certain point our own Government should be on trial because they can not balance their books either. I just wonder why we have people in jail for minor crap when stealing millions only got some people a few years in jail. From Gods point of view, I do not think he sees much difference from immoral and legal to immoral and illegal. Its hard to get that point across to so called believers these days.


kschang profile image

kschang 3 years ago from San Francisco, CA, USA Author

The law has always treated crimes that deprived anything you weren't born with (such as life and rights) as of lower severity than crimes that do (murder, rape, etc.) After all, you can always make more money (theoretically speaking).

I know what you're saying, but I believe my point was there are LEGAL definitions of Ponzi scheme and Pyramid Scheme, and cases were prosecuted as fraud and such. It's not really about morality, too big to be prosecuted, and other injustices. Which is why I remarked that we're going off topic. It's on topic, only in a very tenous / tangential way.


Sanxuary 3 years ago

Yea I know its all right if you lived a lie believing that honesty is what created a good life. Yet when dishonesty is true its so easy to become corrupted by the rules. Sometimes telling the truth of this World makes me feel more like Satan. Why would some small sin create such great sins of unimaginable scales. Do you have any idea how incredibly vast the sin of this World is. You can not take one sin and not run into hundreds of others. If I am a judge I see little time left for this World. A world unable to know good from evil has no hope, for such hope requires sacrifice or the shedding of blood that leaves them as dirty as this World is.


kschang profile image

kschang 3 years ago from San Francisco, CA, USA Author

Now you're WAY off topic. :)


Sanxuary 3 years ago

Do you find it odd that the majority of people in this Country are far worst off then at any point in their lives. Yet the stock markets, banks and investment companies remain completely unaffected by these facts. Most find it in their interest to reduce hours, lower wages and eliminate any possibilities of providing benefits to their employees. They have written off the people of this country and see no reason to self stimulate the economy by doing the opposite. It would be hard to imagine that this is not a deliberate attempt to maintain a status quote. In any case they have proven that they do not need 75 percent of the population to maintain the factors they care about. The average person is a fool to invest their money into any program in this country. Its no longer your money once you invest it and there is no guarantee or responsibility for them to give it back. The odds are better in Vegas.


kschang profile image

kschang 3 years ago from San Francisco, CA, USA Author

Perhaps it is that attitude, that the "normal" investments can't "win", that caused the proliferation of such Ponzi and pyramid schemes, because people need to believe that anyone can have a chance, even if that chance is fake.


Sanxuary 3 years ago

I can agree with that but something as simple as no or low interest during the housing boom sounded like a scam to me. I did not care how small or how many pages of non-readable gibberish, it had to be to good to be true. You have to make money they are not just giving houses away for free. A lot of people never guessed that they would lose everything but the bank got bailed out. I had a job interview with a loan company right before the crash. After hearing all about their money, they actually made me watch the Secret. 60 percent of all refinance loans at that time were the same people. I already knew 3 years prior to the crash that it would happen, it was common sense. I was building homes and you should have listened to these corporate people bragging about their money. After spending millions their factory remains closed. I lived in a house paying rent for 6 months and one day discovered it was foreclosed. Three years later someone finally moved in. Its been seven years and this nightmare never ends and the greed game continues. Honestly, if the World ended we would not notice and it would be better.


Skapegoat 3 years ago

Paul Orberson and Tom Mills banned from MLM by the FTC.

http://www.scribd.com/doc/144134467/Paul-Orberson-...

Read the entire stipulated agreement here:

http://www.joseph-isaacs.com/courtcases/Stipulated...


kschang profile image

kschang 2 years ago from San Francisco, CA, USA Author

Before I forget, Skapegoat is believed to be a pseudonym used by Joe Isaacs. :) The self-proclaimed "crusader" against FHTM after he got sued by FHTM a while back.


International ponzi 2 years ago

I know some people that are in better living global - bidders paradise that screams ponzi. This is based out of Hong Kong. Does the US ever go after schemes that are operating offshore? If not, are there any legal or financial repercussions if you make money on something like this?


kschang profile image

kschang 2 years ago from San Francisco, CA, USA Author

BLGM is virtually a clone of Zeek Rewards Ponzi.

US has closed down many fraudulent operations around the world often with help from several countries. Examples such as "Profitable Sunrise" and "Liberty Reserve" come to mind.

I doubt you'll make money from any such schemes. If you do, it'd make you a "judas goat" just to get you to recruit more people into it.


kschang profile image

kschang 2 years ago from San Francisco, CA, USA Author

A few minor updates...

Mr. Joe Isaacs, who claimed to have helped FHTM's demise, is apparently helping a Ponzi scheme called TelexFree get some sort of telecom license in the US.

Paul Orberson, head of FHTM, died of his cancer in late 2013, after FHTM was closed.

New pyramid schemes and ponzi schemes continue to plague the world.


bankalchemist 2 years ago

if you hurry Joseph Isaacs can get you into TelexFree as he is processing all the state applications so they qualify as a phone service provider VoiP through his Isg-Telecom group. Isaacs also is running a home renovation and investment (with a guaranteed return) through his new www.smartandhandyrenos.com There is something queer about Isaacs and Florida real estate. No word yet on what Barbara Bushe is up to. We can only assume through the SmartandHandy connection her Bushe is getting Trimmed.


kschang profile image

kschang 21 months ago from San Francisco, CA, USA Author

Update Joe Isaacs issued an apology to all the telecom regulatory bodies he applied to on behalf of TelexFree.

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