Pyramid Schemes - A Matrix of Financial Ruin

Pyramid Schemes are not a way to improve your finances. Instead, these plans defraud many people of their money because the returns can never be realized.

In these harsh economic times, persons seeking a quick and high return on their money can be easily swayed to invest. Many people worldwide have lost money in pyramid schemes because of the promise of huge payouts on the initial investments. In recent days, investors in the Virgin Islands have suffered losses in a pyramid scheme. Therefore, it is of utmost importance that persons remain cognizant of fraudulent schemes when investing.

What is a Pyramid Scheme

A pyramid scheme entices investors by offering a huge and quick return on the initial investment with money earned from recruiting more persons to invest. Each new investor is also promised the same high returns once he brings more persons on-board. 

A Live Pyramid Scheme Example

John joins an investment plan where he invests $100 and once he can find four persons to join, he will get $20 for each one that joins. So John can make $80 if he recruits four friends while there is actually $400 being paid in by his four recruits. When each of the four persons, John's second level, invites four more persons, John gets $10 for each of the new investors, now John's third level, and he reaps $160. At John's third level, $1,600 would have been paid in by these new investors.

At John's fourth level, there will be 64 people investing with $6,400 paid in and John will make $320 if his cut is $5 per investor. At a sixth level, the investors increase to 1,024 and at John's seventh level, the numbers soar to 16,384. When the number of investors under John is totaled, it is 21,844 persons and they would have invested $218,440 ($100 from each person) through John's pyramid if there were enough new recruits. This cycle continues because every new investor to the scheme becomes a 'John' starting his own pyramid inviting new recruits.

Why Pyramid Schemes Fail

In the example above, the chances of John being able to increase to the seventh level are slim and an

eighth level would require 87,376 new persons. Problems with recruitment may begin at John's third level because difficulties may have already begun with gathering the 256 investors and as the pyramid grows, it gets worse. According to the Security and Exchanges Commission, "at some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money". After a lower level investor makes his payment and can not find new recruits because of over-saturation, lack of interest or negative feedback, the scheme begins to collapse.

In the Prepared Statement of Debra A. Valentine, General Counsel for the U.S. Federal Trade Commission on "Pyramid Schemes", she considered this latest recruit's perspective as they would have started their pyramid of investors but with being unable to gather recruits, would be unable to recoup their investment.

Virgin Islanders are Defrauded

Janice Dorette Rey, an Anguillan who resided in the British Virgin Islands (BVI) at some point and also the United States Virgin Islands (USVI), was arrested in Dade County, Florida on charges of Obtaining Money by False Pretense, Drawing and Delivering Worthless Checks, Securities Fraud, and Being an Unregistered Broker-Dealer. Rey, according to the USVI Department of Justice and the St. Thomas Source online news, defrauded investors in the USVI and in the BVI of over three million dollars with her pyramid scheme "Global Cohesive Economics (GCE)". She promised high returns on the investments and in the end was unable to maintain the promises and was eventually caught by authorities.

Errol George of the BVI Financial Investigation Agency Speaks

Rey's scheme caused the Financial Investigation Agency of the British Virgin Islands (FIA) to remind the territory of the danger of investing without researching first. FIA's Director, Errol George issued a press release about Rey's fraud advising people to be more vigilant because such fraudulent schemes are marketed well and lack of understanding and ease of trust make for easy targets.

The Director, when interviewed, suggested that persons interested in investing should be extremely careful before entering any investment and they should research, investigate and ask questions if there are any doubts. He noted that it is very prudent to seek advice from the general business community and the financial regulatory body in the country, such as the Financial Services Commission (FSC) in the BVI. George also suggested that persons should go with their gut feelings especially if the aura is negative. Everyone wants to make large sums of money in the fastest and easiest way. This makes it easy for thieves to come up with ways to defraud investors who are not investment or business savvy.

Pyramid and Ponzi schemes sound good to the listener but really do cause monetary losses and potential financial ruin depending on the level of investment since there is no way for the scheme to maintain the promised returns. Investors are reminded that they need to think carefully and choose wisely about the type of investment they want to pursue to avoid such schemes. Research, consultation and investigation are key to avoiding financial ruin from pyramid schemes.