This short article focuses on the Ethics of Network Marketing. Can gifting programs fit into the definition of a legal direct selling business model?–NO—Please read this.
This issue may be off the radar for now, but do not let down your guard. I do not need to say much more about gifting programs than to quote legal documents from grand juries, prosecutors, and district attorney’s across the United States. Everything below came from such documents. I am only going to identify the states the quotes came from, and not actually name any programs, as the purpose of this article is not to attack any specific program, but to alert the reader to the inherit flaws and risks of gifting programs in general. There is NO WAY these programs can be “legalized” as legitimate direct selling programs. If you believe you should be allowed to give your money to anyone you choose, that is only true up to a point. The Regulators and prosecutors define the “point” (after which a law is broken) as the program designed expectation that you will get back more that you gave. STAY AWAY.
Two local residents allegedly involved in a gifting club that was promoted locally this summer made initial court appearances on Wednesday. ABC and DEF were both charged with felonies in connection with what law enforcement officials call a pyramid scheme. The next step in both cases is an arraignment during which they will enter pleas. Dates have yet to be set. The pyramid scheme involved recruiting people to invest $2,000 with the lure of a $16,000 return — the original $2,000 and $14,000 profit. ABC was charged with three felonies — selling unregistered securities, transacting business as an unregistered broker-dealer, and fraud. All are Class 4 felonies, each punishable by up to 10 years in prison and/or up to a $10,000 fine. She is free on a $5,000 personal recognizance bond. DEF was also charged with selling unregistered securities, and theft by deception. The latter is a Class 1 misdemeanor, punishable by a year in jail and/or up to a $1,000 fine.
From South Dakota – a Grand Jury Indictment is being quoted.
Last month, the administrator of the department issued an order to cease and desist against a money exchange program. Participants initially were solicited to pool cash gifts of $100 to join and to advance through various levels or a reverse pyramid through the recruitment of others who likewise made gifts. The levels of the program were described as freshman, sophomore, junior and senior. Participants were encouraged to complete the program’s six steps. The amounts required to participate in each of the six steps ranged from $100 to $4,000. After completing six levels, participants made gifts of $7,850 in expectation of receiving “tax free” cash payments of $62,800.
From an Oklahoma Cease & Desist Order
A Danville grand jury has indicted 14 more people accused of participating in a pyramid scheme that swept across Southside Virginia earlier this year. Eight of the people indicted last week have been summoned to appear for arraignment Friday. In February, Danville police and the Pittsylvania County Sheriff’s Office began to track down participants in an operation that recruited groups of eight people to “donate” $2,000 each and “cash out” with $16,000 once they reached the top of the list. Some participants were said to have made as much as $100,000. Pittsylvania County Commonwealth’s Attorney defined the program as a pyramid scheme, in which participation is a misdemeanor punishable by 12 months in jail and a fine of $2,500.
From a Danville, Virginia Grand Jury Indictment
A Clay County Circuit Judge today ordered eight Kansas City area women to pay a total of $198,000 in restitution and penalties for their participation in an illegal pyramid scheme. Last week another Judge granted a motion for summary judgment by Attorney General Jay Nixon and entered a finding that the program was an illegal pyramid under Missouri law. Today’s judgments conclude two lawsuits brought by Nixon against promoters of an illegal pyramid scheme. Additional lawsuits in Clay County, against defendants in connection with the program, and in St. Louis County against defendants in connection with the program, are still pending. Nixon said the operators of the program called it a “gifting tree” or “gifting network.” The scheme often took the form of a four-course dinner party, with participants entering at the “appetizer” level and paying $5,000 to the person at the top, or “dessert” level. Appetizer-level participants move up to the “soup & salad,” “entree” and “dessert” levels as more participants are recruited at the lowest level. Nixon said these terms and the number of levels may vary from scheme to scheme. “This order from the court declaring this to be a pyramid serves as a clear and unambiguous notice that these schemes are illegal, and that anyone who participates in them is breaking the law,” Nixon said.
From a Liberty, Missouri Judicial Order
More than 1,000 people involved in illegal “gifting clubs” have applied for amnesty from prosecution, state officials say. However, when the deadline for seeking amnesty passes next weekend, district attorneys across the state will start preparing to file charges against those who have taken part in the pyramid scheme. Under the amnesty program, people who received money from others in “gifting clubs” have until Dec. 31 to return the cash and cooperate with investigators by naming names. Those who refuse could be charged with violating the state’s gaming and pyramid scheme laws. The maximum penalty for that crime is $5,000 and five years in prison. Officials at the state Department of Agriculture, Trade and Consumer Protection began to hear complaints last summer from residents who said they were led to believe that by giving someone $500 or $2,000 to get on a gift board, they would receive up to eight times that amount. In the gifting clubs, a new variation of the old pyramid schemes, participants simply “give” gifts to each other. While most participants are told they should not expect anything in return for their gift of $500 or $2,000, those who give money are clearly anticipating they will be reciprocated by others who join the “club” after them. “A pyramid scheme is nothing more than a very expensive game of musical chairs,” said Bill Oemichen, administrator of the Division of Trade and Consumer Protection. “When the music is over, most people have lost $2,000 and are angry at the person who recruited them.”
From the Wisconsin Consumer Protection Agency
Missouri and Wisconsin have obtained orders halting the operation of two gifting clubs. Wisconsin alleged that the defendants, GHI and JKL Corp. sold improper legal opinions to consumers advising them that gifting clubs are legal. GHI was not a licensed attorney. Missouri filed suit against MNO and PQR alleging that they gave 25 presentations to induce others to participate in their program. Missouri already has orders halting the operation of several gifting clubs.
From Missouri & Wisconsin reports
Sacramento sheriff’s detectives Wednesday arrested four women, alleging they took in hundreds of thousands of dollars by promoting a pyramid scheme and secretly cheating in the “gifting” club marketed as empowering to women.
From a Sacramento, California arrest record
In New Mexico a gifting program setup resulted in four grand jury criminal indictments. More than 400 people who bought into the New Mexico scheme have applied to get at least some of their money back through a restitution program that may let those who profited avoid prison time.
From a New Mexico Grand Jury Indictment
James Walsh, author of You Can’t Cheat an Honest Man: How Ponzi Schemes and Pyramids Work and Why They’re More Popular Than Ever, (Available at Amazon.com) calls these gifting programs by their true name: pyramid schemes, a transfer of capital not based on any profit-earning activity. For each investor to recoup money, two more must join the club. “Generally, these schemes signal a growing gulf between the haves and have-nots,” says Walsh. “One of the dangers of the dot.com bubble was that it de-linked notions of real value with compensation. When the unsophisticated investor lost in the downfall, he decided the whole system was a crooked scheme anyhow, so this little party isn’t any worse than eToys.” The tide, however, is turning. In 2003, club busts and pending charges have been reported in California, Hawaii, Oregon, North Carolina, Maine, Iowa, Pennsylvania, Texas, Oklahoma and New Mexico. In addition to seeking the usual criminal penalties, some prosecutors want club sponsors to make restitution to the victims. But the chances are slim that the once-enthusiastic club members will ever get their money back. The best defense, Walsh maintains, is to avoid forking over the dough in the first place, despite the friendships involved. “Ask, ‘What is the business?’ What are we selling? Recognize that ‘networking opportunities’ is not a commodity,” he reminds. “Don’t accept the gibberish about the new economy and the velocity of money. Keep asking, ‘What’s the underlying transaction?”
Quotes from Author, James Walsh.
To wrap up, direct selling is an incredibly effective channel of distribution, going as far back as the early Avon, Fuller Brush, Vacuum Cleaner, and Encyclopedia business models. The channel was enhanced and changed forever in the 1950’s, when companies began offering their independent contractors two ways to make money. They were offered a financial incentive, obtainable through their own sales efforts, and also an additional and optional financial incentive, obtainable through the sales efforts of other independent contractors they introduced to the company. Do not let illegal pyramids, of which gifting clubs are but one form, tarnish and jeopardize this rewarding, and very legal, business model for delivering products and services to North American consumers.