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Ponzi schemes proliferate on the Web
San Francisco Chronicle


April 13, 2009

A pyramid scheme that regularly surfaces during recessions is gaining momentum, this time supercharged by the social-networking power of the Internet, according to the Better Business Bureau and other consumer-watchdog groups.

Cash-gifting programs are spreading rapidly online, popping up in growing numbers of sponsored advertisements, search results and user-generated videos on sites like Google, Yahoo and YouTube.

In many cases, promoters pose in front of Web cams and count out $100 bills they say they received in the mail. They offer viewers the chance to make thousands of dollars a week from home, dismiss claims that cash gifting is a scam or illegal and encourage surfers to contact them or join their program.

If Web surfers come across such videos or advertisements, "bells and whistles should be going off in your head," said Alison Southwick, a spokeswoman for the Better Business Bureau, which plans to issue a warning about cash gifting in the coming weeks. "Money is just changing hands, and most of the money is going to the people at the top of the pyramid."

Her group isn't alleging wrongdoing by any specific companies at this point, and a representative with the Federal Trade Commission said he couldn't, as a matter of policy, comment on whether the agency is conducting any investigations.

Many of the programs appear to be updated versions of what are known as affinity-based pyramid schemes that spread across the country beginning in the 1980s, in variations known as the Airplane Game, Corporate Ladder and Women Helping Women, said Robert FitzPatrick, president of Pyramid Scheme Alert in Charlotte, N.C. They tend to become more popular as people grow desperate during economic downturns, and were at their height during 2001 and 2002.

The typical structure of gifting schemes is simple -- and illegal. New club members provide cash "gifts," often totaling thousands of dollars, to senior members. The rookies are promised that as they recruit additional people, they too will receive several times their initial investment. The rub, as with most pyramid schemes, is that membership has to grow ever larger for the system to work. Once it stalls, the scheme collapses. Generally, 90 percent of participants don't make any money -- and lose their initial "gift."

The earlier party versions were typically positioned as social clubs creating opportunities for minorities and other groups with limited economic prospects, FitzPatrick said. They emphasized the "gifting" nature of the program and community self-empowerment, while downplaying the cash. Some of the new online programs are still touted as fund-raisers or billed as helping a specific group, but many are blatantly promoted as get-rich-quick enterprises.

"The overt use of the Internet and calling it by name, a cash scheme, right off the bat, represents a new escalation," FitzPatrick said. "It's been getting bigger, and now it's getting bolder. It's formalizing itself as a system that exerts its legitimacy and legality."

The Better Business Bureau advises people to steer clear of any program in which they must make an "investment" for the right to recruit others, if they receive money for finding those people and if that new individual has to put up cash.

Put more simply, if everyone investing money expects to get more than he or she put in, "that would give you an indication that it is both illegal and that you will probably lose all or most of your money," said James Kohm, associate director of the enforcement division of the FTC.


E-mail James Temple at jtemple(at)
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