Tuesday, June 12, 2012

Myths about Pyramid Schemes Busted!

The unsustainable geometric progression of a c...
The unsustainable geometric progression of a classic pyramid scheme, from Securities and Exchange commission report on pyramid schemes. (Photo credit: Wikipedia)
Pyramid scheme defenders often used myths to "defend" their little "opportunity" as "not a pyramid scheme". Here are some of the myths they used, and how you can bust these myths and send the scammers packing.

Myth: We have a product / service, therefore we are NOT a pyramid scheme!

Verdict: Logical fallacy -- red herring

If the compensation plan pays on recruitment, not sales, it's a pyramid scheme. The existence of product or service is IRRELEVANT, thus red herring.

Myth: No purchase is required! or Membership is free! Therefore it's not a pyramid scheme!

Verdict: Logical fallacy -- red herring

If there is an option to buy-in is there (i.e. there are free as well as paid memberships, or "upgrade", or whatever) then it still could be a pyramid scheme. Existence of free membership neither proves nor disproves it is a pyramid scheme or not. It is irrelevant, thus, red herring.  Furthermore, it is possible for products to act as money replacements. It could STILL be a pyramid scheme.

Myth: We sell products and pay for recruiting! We do both! We are legal!

Verdict: False

If you do pay on recruiting, it doesn't matter if you also sell products... You are a pyramid scheme. This is established very clearly in FTC vs. Koscot Interplanetary (1975). Koscot membership pays both on sales and recruiting. Koscot is a pyramid scheme.

Myth: We don't promise a return! We are not an investment! Therefore we're not a pyramid scheme!

Verdict: Logical fallacy -- red herring

Existence of a disclaimer that participants may not make certain amount of return is irrelevant. What matters, again, is the compensation model... if it pays on recruiting, it is a pyramid scheme.  Many scams have such disclaimers.  The real test for whether it's an investment or not is the "Howey Test".  Besides, an investment is usually a Ponzi scheme, not a pyramid scheme. 

Myth: Recruiting people is hard work, not a scam!

Verdict: Logical fallacy -- red herring

The difficulty of recruiting is unrelated to whether an opportunity is a pyramid scheme or not. A pyramid scheme is illegal, no matter how difficult it is to recruit for. This excuse was used by Glenn W. Turner back in 1973 when he tried to peddle a pyramid scheme and got nailed by the SEC. The court rejected it.

Myth: Recruiting people is legal! Headhunters do it! So this is not a pyramid scheme!

Verdict: Logical fallacy -- red herring

There are FOUR PARTS to the definition of a pyramid scheme. All four parts must be present for the scheme to be considered a pyramid scheme. Recruiting people is merely ONE PART out of four. Thus, arguing whether ONE part (but not all four) out of four is legal is irrelevant, and therefore a red herring.

Myth: Our structure has ______, ______, and ______! Pyramid schemes don't have that! We are not a pyramid scheme!

Verdict: Logical fallacy -- red herring

By naming SOME characteristics that is not universally shared among pyramid schemes (or even completely unrelated to pyramid schemes) they hope to distract you from applying the REAL DEFINITION of pyramid scheme to their little scheme.

Myth: In a pyramid only the top makes money. In our matrix scheme everybody has the same chance of making money! So we're not a pyramid scheme! 

Verdict: Logical fallacy -- equivocation

This is fallacy of equivocation because their definition of "equal" is not the normal sense of equal. They call it "equal" because they claim "everybody can be on top... eventually". They don't tell you the caveat: "but only if you find enough people under you to prop you up, as your upline used you to prop himself up". Now YOU have to find enough suckers  recruits to cycle you out. It is NOT "equal".

Myth: We're a matrix / board / whatever, not a pyramid scheme!

Verdict:  Logical fallacy -- equivocation

Whatever the word they used, it is the actual definition that matter. Using other words is just confusing the issue.

Myth: Pyramid schemes are not bad! Pyramid schemes are all around us! All companies have a pyramid structure!

Verdict: Logical fallacy -- equivocation

Pyramid "shape" or pyramid "structure" is not "pyramid scheme". This is a spin on the "so is everything else" variant of the "tu quoque" fallacy.

Myth: The definition of pyramid scheme is _____, _____, and _____, and we are not that!

Verdict: Logical fallacy -- false equivalency

There is only one DEFINITION of pyramid scheme. Everything else is about what pyramid schemes *do*, and they vary widely. Often, the characteristics named belongs to some variants of pyramid scheme, but not others, thus they do not constitute a proper refutation. There are also some cases where the defender outright invented the definitions.

Myth: We're running on 2/3/X years, and we're still here! Thus we're not a pyramid scheme!

Verdict: Logical fallacy -- appeal to time/age

Age has nothing to do with whether the business is legitimate or not. A well disguised scam can last for a long time.

Myth: We're endorsed by _______! _______ would have never endorsed a scam! 

Verdict: Logical fallacy -- appeal to authority / appeal to false authority / appeal to idol / appeal to association with authority

Some scams are known to misquote celebrities to make it as if the celebrity is endorsing the company (or the industry). Other scams are known to hire celebrities as spokespeople or appear at events and claim that somehow proves they are not a scam when there was no such endorsement.

Also see the next myth for a related version.

Myth: We hired many lawyers and consultants for compliance! We're not a pyramid scheme! A pyramid scheme would have never hired lawyers!

Verdict: Logical fallacy -- appeal to "association with authority"

Even mobsters need lawyers. Having lawyers and consultants, even famous ones, does not prove in any way they are legitimate or compliant with the law. Furthermore, nobody is flawless. Gerald Nehra, one of the best known MLM attorneys, were also known to have certified "Ad Surf Daily" as being compliant with laws, only to see SEC, Secret Service, and more raid that "business" and closed it as a Ponzi scheme.

Myth: We are NOT a pyramid scheme! We are legal!

Verdict: Logical fallacy -- false dilemma

There are many illegal scams that are NOT pyramid schemes... Ponzi scheme, for instance, is also illegal. Thus proving the scheme is NOT a pyramid scheme does NOT prove it is legitimate. It ONLY proves it is not a pyramid scheme.

Many pyramid schemes are actually Ponzi / Pyramid hybrid schemes.


Have you encountered any other pyramid scheme myths that scammers used to defend / promote their pet scheme?

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  1. ...and you can most certainly add Penny Matrix to that argument. I WAS in this up until recently - have you heard of that, Kasey?

    1. Frankly, I stay away from anything named "Matrix", unless it's the movie series. ;) (Or maybe Arnie in Commando...)