How to detect a pyramid or Ponzi scheme

RICHMOND, VA (WWBT) - Two million people fell for the ZeekRewards Penny Auction, which investigators call a $600 million dollar Ponzi scheme.

Reacted Nick Hall in Chesterfield, who invested in and recruited participants for ZeekRewards, "We were a lot of smart people in the Tri-cities that were fooled by one man."

Former Henrico Police officer Donald Lacey was convicted of running a property-flipping Ponzi scheme.

Said one of his investors, Marc Denning, "Sometimes you'd almost have to laugh or then you'd cry."

Here's how pyramid schemes work: Someone recruits people to invest in a business or to sell a product. Those people recruit more people, and so on. The returns paid to the recruits aren't from profits, they're funds from the following tier of recruits. But when there's not enough money to pay all of the recruits, the scheme collapses. People at the top of the pyramid usually make a lot of money. People at the bottom, usually lose it.

Robert Fitzpatrick runs Pyramid Scheme Alert, an organization dedicated to warning you. He says there are no obvious signs of a pyramid scheme, but there are questions to ask.

First, does the business really make money from selling a product, or from recruiting participants?

Said Fitzpatrick, "If that's the case, forget all the rest. I don't care if it's a miracle vitamin pill or a fruit juice that will cure cancer. I don't care if some celebrity endorsed it. If that's the basis for the plan, that's a flim-flam."

Do you have to pay money to be involved?

Explained Fitzpatrick, "Are they charging you to join? Are they charging you to be trained? Do you have to keep buying the product to qualify for the commission?"

Are they making promises of big returns for little work? That's a red flag, too, he says.

You can check a business's record with the Better Business Bureau or Attorney General. But pyramid schemes rarely receive complaints because victims are embarrassed.

Said Fitzpatrick, "Let's remember Bernard Madoff, who ran the biggest Ponzi scheme in American history, had no complaints. All his investors were perfectly happy. They didn't see the flaw in it."

Maybe you've heard about a business and are wondering, "What about this one?" has a web page called "What About This One?" that shows you how to tell a scheme from a legitimate business. You can submit your email address and it will provide you with a checklist of warning signs, for free.

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