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.
