Pyramid plunder

As pyramid schemes continue to infiltrate Maine, a few get rich, and the rest lose their shirts

By Noah Bruce

Maine Attorney General Steven Rowe couldn’t have asked for choicer pickin’s. Four women involved in a group called “A Woman’s Project” are suing the attorney general and all of Maine’s district attorneys, hoping to legitimize an organization prosecutors say is a pyramid scheme. But they may just be offering themselves as lambs for the slaughter.

Assistant attorney general James McKenna says prosecutors will “respond and aggressively pursue the issue.” The associated press reported on February 23 that Rowe said he “welcomed the suit.”

And he should. Even a cursory examination of the facts reveal that “A Woman’s Project,” also known in different areas of the country as “Women Helping Women” or “The Dinner Party” is nothing more than a “naked” pyramid scheme — a scheme that involves only the exchange of money, unlike pyramidal multi-level marketing businesses that hide behind the purported sale of products.

This pyramid is for women only, and they are often encouraged to hide their participation from any significant others. It works like this: at the base of the pyramid are eight women designated as appetizers, above them are four soups and salads, and then two main courses. At the top is the “dessert,” the woman who is the beneficiary of the party. Each appetizer “gifts” $5000 to the dessert who is said to “have her birthday.” After the birthday girl receives her gift, the pyramid splits. Everyone moves up a level, or “course,” and the women must now find eight new appetizers for each pyramid.

Hancock County District Attorney Michael Povich notes that women will go to great lengths to come up with these presents. People without $5000 are “told they can max out credit cards, take money from home equity loans, even borrow against their life insurance,” he says.

Once at the party, the appetizers are encouraged to pool their $40,000 “birthday” gift in a creative fashion like sewing it onto a vest, putting it in a Monopoly box, or presenting a treasure chest.

Leah Kuntz, a woman who was involved in the scheme in Arlington, Texas says she, along with seven other appetizers, “made a money tree by taping bills to a ficus plant.”

The first function of the “birthday parties”, an exchange of money, serves its second: recruitment. A potential appetizer witnesses a woman receive $40,000 in $100 and $50 bills – more cash than most people have seen in their lives — and realizes she, too, could be the recipient of such a gift. To someone who really needs the cash, even someone with a healthy dose of cynicism, the sight of a money tree handed to someone who did no work for the gift must be truly tempting.

According to Kuntz, it was partly the money that suckered her in, but it was also the idea that she would be doing something good for other women.

“It was both — the opportunity to make money and the idea of helping people,” says Kuntz. “They get you right where it hurts — ‘Women Helping Women.’ The meeting was on the verge of being emotional. It’s kind of how they would get you hooked. It seemed so wonderful.”

Anne Cardale doesn’t think “A Woman’s Project” is wonderful at all. She is center coordinator for the Maine Center for Women, Work and Community, a group that offers training to help women succeed in the Maine economy. “This is something we really don’t like,” she says. “My big concern is that it’s targeting vulnerable women, playing on vulnerability. The people feel like they’re joining something as well as making a financial investment.”

Kuntz went to two meetings before she gave her $5000 gift.

But like the majority of people who participate in pyramid schemes, she got in at the wrong time. When her local news ran a story warning about “Women Helping Women,” the flood of women willing to join halted and the pyramid toppled. Though she recently successfully sued the woman to whom she gave her gift, Kuntz has not yet received any of her money back.

The earliest media reports of “Women Helping Women” came from Canada in July of 1998 and according to ABC’s Dateline, which ran a piece on the pyramid in February, it has spread to 13 American states in the west, the southwest, the Midwest and one northeastern state — Maine. “If you look at the map of the US with the states that have the pyramid highlighted, Maine sits up at the top like a sore thumb,” says Povich, who has appeared on television and radio to warn women about the illegal pyramid, and is named in the “A Woman’s Project” lawsuit.

According to Povich, who first heard about the pyramid in January 2001, “Women Helping Women” is especially active in Waldo, Hancock, Washington and Penobscot counties. McKenna reports that he has received reports of the pyramid from all over Maine including Aroostook and Washington counties; Portland, Bangor, Augusta; and the coast.

Under Maine law, pyramids like “A Woman’s Project” are classified as an illegal lottery. Though there is a potential criminal penalty of 11 months in jail and a $5000 fine, in June of 2000 the state decided to handle pyramids in civil court. At that time, Maine asked people involved in a scheme active in Lewiston, known as “Changing Lives,” to return any money they had received from those lower down on the pyramid. Currently, the state is actively prosecuting those who refused.

The women suing the state’s attorneys, Deborah Henderson of Lowell, Meg Peterson of Brooks, Susan Hart of Belfast, and Beth Connor of Washington, hope to head off even that much litigation against them. They claim their right to association, guaranteed by the first and fourteenth amendments, was violated when state’s attorneys labeled “A Woman’s Project” illegal in the media. They are seeking an injunction prohibiting the state from prosecuting the plaintiffs, a judgment that their activities do not violate state law, reimbursement for attorney’s fees, and “whatever further and additional relief shall appear just and proper.” The suit is unusual because aside from using the press to warn Mainers about the pyramid, the attorney general has not yet taken any action against “A Woman’s Project.”

It seems that the Maine statute which prohibits pyramid schemes leaves the plaintiffs in this case standing on virtually non-existent legal ground. The law says that an organization where money “to be paid or given by members [appetizers] thereof is to be paid or given to any other member [dessert] thereof who has been required to pay or give anything of material value [$5000, when she was an appetizer] for the right to receive such sums.”

Susan Hart and Beth Connor declined to comment on the case on the advice of their lawyer, but Connor did offer a prepared statement that reads:

“Women have been gathering in circles for centuries pooling their resources to support one another. What we are doing has been described as a pyramid. But we do not believe that it is. We have decided to be proactive and therefore are seeking a court’s determination that our activities are legal.”

While in no way providing any reasoning to deny the fact that “A Woman’s Project” is a blatant pyramid scheme, the statement fits the pyramid’s clever marketing by conjuring a picture of a mystical group of ancient women gathered together in a circle.

Regardless of their motives, simple logic proves that pyramid schemes are illegal for a good reason: every dollar that one person receives is a dollar taken from another person. When a pyramid falls apart, the people who have not reached their payday lose their money. The longer it goes on the more people will be stuck.

It is also important to note that to become a dessert every woman who joins as an appetizer must eventually sit atop her own pyramid supported by 14 other women who each contributed $5000. That’s $70,000 per pyramid or $560,000 for eight pyramids. “That’s a lot of money to be raising in a poor area like northern Maine,” says Povich.

And when a pyramid falls apart, the number of people who lose money is always far greater than the number of people who made money. For example, say the “Women Helping Women” pyramid reaches 16 levels in a certain area and then falls apart. This would mean there were over 32,000 appetizers, 16,000 soups and salads, and 8000 main courses, a total of more than 57,000 women in the pyramid who contributed $5000, compared with little more than 8000 total women who moved through the pyramid and received $40,000.

Finally, a look at the sheer numbers it takes to support such a project refutes any claims of continued growth. If you start hypothetically with a single woman who starts a pyramid like “A Women’s Project,” and she recruits two women, and these two recruit two each and so on, by the time the pyramid reaches level 30, it requires the participation of over 500 million women, nearly double the amount of people living in the US.

In reality, pyramids never run long enough to exhaust a population. Instead, says, Robert Fitzpatrick, author of a book on the subject called False Profits: Seeking Spiritual Deliverance in Pyramid Schemes and Multi-Level Marketing, the schemes usually fall apart when a reporter on the evening news tells everyone the scheme is illegal, as happened to Kunst in Texas, and to “Changing Lives” here in Maine.

Similar to pyramids such as “A Woman’s Project” — but more insidious, more common, and more destructive — are multi-level marketing (MLM) businesses, also called network marketing businesses. Sometimes legal, though usually nothing more than a cleverly disguised pyramid, multi-level marketing uses the supposed sale of products or services, and sometimes complicated compensation models, to appear legitimate. However, the premise is often the same as in a naked pyramid — later investors pay money to earlier investors.

Augusta is home to a new MLM called Leverage 135. A quick tour of the company’s website (www.leverage135.com) reveals one of the hallmarks of a multi-level pyramid — a compensation system that rewards participants more for recruiting than for retail sales. According to James Kohm, assistant director of the bureau of consumer protection at the Federal Trade Commission, the arm of the federal government that prosecutes pyramid schemes, when this happens “effectively what you’re doing is just using a product as a surrogate for payment for the right to recruit.” This is exactly what Leverage 135 does.

To join Leverage 135 and become an “associate,” one must purchase one “product pack” — which can contain anything from six cans of beef stew to several bottles of vitamins — for $135. By doing this, the new recruit becomes the head of what the site refers to as a “three-level matrix.” Each associate is supposed to recruit three people who fill the first level of the matrix. Level two has nine places that are filled when each person on level one recruits three more people. Finally these nine must each convince three additional folks to join, for a total of 38 people in the matrix.

Now here’s the scam: you don’t start making any real money till level three. For every person an associate sign ups at level one or level two, they receive a grand total of $2 commission. That means you could sign up twelve people (no mean feat) and receive a scant $24. Only at level three do you start making any real money, where every new recruit is worth $60. So if you manage to fill the entire matrix, you stand to earn $1644. Remember though, that every person who joins hands over $135 to the company, and Leverage 135 only pays out significant commissions when an associate begins to fill his third level.

Yet, you really don’t even have to look at the matrix to realize that Leverage 135 is not focused on the sale of its products. Although the company claims “Our products attract value-conscious consumers who want the best for their families and themselves,” it seems unlikely that someone who was not interested in joining the business would be keen on purchasing “six cans of high quality non-stimulant energy drink” for $135 (or more if you intend to make a profit), or two bottles each of “all natural and highly concentrated” pet shampoo and conditioners, also for $135.

Stan Mairano of South Portland went to a Leverage 135 meeting. Though he was skeptical, he says he went “because I didn’t want to disappoint my friends” who asked him to attend. However, Mairano brought questions to the meeting, questions the speakers were unable to answer.

“They kept talking about their backers from California, but they wouldn’t say who they were,” he says. “They were trying to hype it up, saying how they were about to go public, but they couldn’t explain what this meant.”

Mairano says about ten people attended the meeting, held in the home of someone involved in the business. He says when he left the meeting, the speaker was reluctant to shake his hand because Mairano had put him on the spot. Needless to say, Mairano did not become an associate. “I saw right through those guys,” he says.

But Mairano couldn’t talk his friend out of joining Leverage 135. “I couldn’t believe he wanted to be a part of this thing,” says Mairano.

Kohm points out that not all MLMs are malevolent. “Not every MLM is a pyramid scheme,” he says. However, Fitzpatrick says in his research he has found only three MLMs that are not pyramids — Avon, Mary Kay, and Tupperware. Like less-legitimate businesses, these companies have an element of recruitment but unlike pyramids these companies actually sell over 80% of their products to people outside the pyramid.

Jon Taylor, president of the Consumer Awareness Institute, a group that helps federal prosecutors decide which are the worst MLMs, says these groups are “coming out of the woodwork. These things are coming out by the 100s, if not the 1000s. It’s like a cancer. People get the idea they can work for a couple years and then don’t have to work anymore.”

The chance of actually profiting from a pyramidal MLM is very small. According to Kohm, “in most of the MLMs we prosecute, the percentage of people who lose money is 90%.” Unlike a naked pyramid scheme where a winner graduates from the pyramid, the people at the very top of MLMs are usually permanently entrenched; and most often they receive a cut from the sales of everyone beneath them. Also, the stakes are usually higher in an MLM. While you can lose big money in either, only in an MLM can a person waste years of their life fruitlessly searching for financial independence.

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The history of pyramid schemes like “A Woman’s Project” and “Changing Lives,” as well as MLMs like Leverage 135, begins with Charles Ponzi, an immigrant from Italy living in Boston who in 1919 organized the Securities Exchange Company. This company sold promissory notes that guaranteed a 50% return on investment in 90 days. The seemingly incredible opportunity created an investment frenzy in Boston and through this and other schemes, Ponzi pocketed $15 million before his ruse was exposed. Though he claimed he had discovered a miraculous investment technique, all he had really been doing was paying earlier investors with the money from later investors — the same principle that modern pyramid schemes use. Today, Ponzi scheme is a synonym for pyramid scheme.

According to Fitzpatrick, the next evolution of pyramid schemes can be found in a chain letter that began during the Depression. The letter contained a list of people and the idea was to send a dime to the person at the top of this list. To continue the chain and hopefully make lots of dimes, a person created ten reproductions of the letter. He or she removed the name at the top of the list, moved everyone else up one space and inserted his or her name at the bottom. Then the letter was to be sent to ten of that person’s friends and associates.

According to Product-Based Pyramid Schemes, a document written by Taylor and designed to educate the public, these types of letters were still around in the ’70s when a famous example from California called “Circle of Gold” circulated the country. However according to the report “many of these chain letters went underground because of aggressive enforcement of federal mail fraud statutes.”

In 1967 a man named Glenn Turner from Tampa created an early MLM called “Dare to Be Great” that purported to sell cosmetics, but, like Leverage 135, really sold the right to recruit more people. Product-Based Pyramid Schemes reports that in five years Turner turned $10,000 into $200 million.

Even before “Dare,” Amway, one of the earliest and most famous MLMs, began in 1959. According to Taylor, the FTC made a major blunder in 1979 when it ruled that Amway was not an illegal pyramid scheme. The decision, writes Taylor, “has given credence to MLMs and led to enormous growth in an industry that has cost consumers tens of billions of dollars.” In an interview with the Phoenix, Taylor said “the FTC has not really wanted to roll up their sleeves and do the math.” This has allowed MLMs, he argues, to change their rules to avoid prosecution.

However, according to Fitzpatrick, America may finally be tiring of Amway, if not other MLMs. He claims the company has finally tapped out its US market, and now 80% of its business comes from abroad in countries like Japan, Korea, India, and African nations.

The rise of the internet in the second half of the ’90s has provided MLMs with a powerful growth mechanism. Last year in Maine, 1200 people were convinced to pony up $250 each to a company known as Bigsmart.com, a national company which operated locally out of Scarborough. The money bought an internet mall where supposedly consumers could go for one-stop shopping on the internet. For every mall a distributor-person sold, they made a commission of $25. According to the attorney general, however, the malls were basically worthless.

The Portland Press Herald reported that Bigsmart recruited Mainers in emotionally charged meetings held in hotels and restaurants, even the State Theatre. In May of 2000, the attorney general settled with the company and required that they pay back all the money it had made from Mainers, and pay $50,000 in court costs.

2000 was also the year Maine attorney general’s office busted up the “Changing Lives” pyramid scheme. The scheme thrived in the Lewiston-Auburn area and was similar in function to “A Woman’s Project.” The outward form of the pyramid, however, was different. First the stakes were lower — $2000 instead of $5000. The pyramid was open to men and women and meetings were never held, instead recruitment was done one-on-one. Changing Lives was so widespread that it even involved two police officers from the Lewiston PD and an unknown number of officers from the Auburn PD.

In June of 2000, the attorney general’s office responded to complaints about the pyramid by ordering everyone who profited to give the money back. In January of 2001, the office began the process of suing those who refused.

Michael Gilbert, who brought the pyramid from Lewiston to South Paris describes it as a “frenzy, it took off so fast.” Gilbert used his apartment as a sort of transfer station for the funds. “I bet you in one weekend $150,000 or $180,00 changed hands in my apartment.” The pyramid moved so rapidly that the second time Gilbert entered it he received payment in 4 hours. However, after the pyramid fell apart, Gilbert paid back all the money he made, but never had his $2000 investments returned. In all Gilbert claims he lost around $10,000. He also describes the negative emotional factors of the pyramid.

“There were a lot of bad feelings,” he says. “There was competition in workplaces to pull people into it. It spilt friendships. Money became a huge factor.”

Several people involved in the scheme felt that if the attorney general’s office never broke it up, the pyramid would have continued.

A man, who did not want to give his real name, from a town near Waterville, claims “The crazy part is, the deal works. The only time you lose money is if the attorney general comes on the TV and says ‘la la la it’s a scam.’ ”

An Auburn woman who also preferred to remain nameless blames the people who complained to the attorney general. “When you make a decision to do something, stick with it,” she says, “don’t go crying to the attorney general.”

So what would make someone join a pyramid scheme? According to Fitzpatrick the answer lies deep in the values of American society.

“Underneath our daily lives runs a message that says that everybody is worthy according to their wealth,” he says. “Therefore if I’m not rich, I’m not worthy. . . I haven’t established the validity of my existence. And then there comes a scheme that says you can get rich quick.”

And the notion that you will get rich is inherent in pyramid schemes. Log onto the Leverage135.com website and you’ll see graphics of a yacht, a tropical mansion, a BMW, and a private jet. The message of course: join Leverage135 and all this will be yours.

Nearly all the people we interviewed who participated in “Changing Lives” said that someone they knew, who received the $16,000 payoff, had shown them the actual cash and this had helped convince them to join.

Jean Sproul works as a receptionist at a dental office. “My boss walked in with $16,000 and I saw the money,” she says. “It would have been a quick fix for me. I would have been able to get out of debt.”

Gilbert, the man who brought the scheme to South Paris, says he heard about the pyramid several times before he joined but he “blew it off.” But when a “guy who didn’t have a pot to piss in made $16,000,” Gilbert says he couldn’t resist.

Fitzpatrick points out that it’s not just poor people who join. “It has nothing to do with how much money people make,” he says. Kuntz, the woman who participated in “Women Helping Women in Texas, agrees. “There were women from all walks of life,” she says. “There were lawyers, doctors, housewives, business women, beauty professionals.”

Nancy Artz, a professor of business administration who teaches consumer behavior at USM, says that one factor that makes it easy for pyramids to recruit is that most people trust that the government wouldn’t allow scams to exist.

“Basically our economy is so well developed,” she says “and we have such good legal precautions, most people take it on faith that it’s going to work.”

Most pyramids make outright claims that they are legal. Dwight Sanborn, another “Changing Lives” participant, says “They had this legal form that you sign, I said ‘Jesus it must be legal.’ ”

Finally, people involved in pyramids often create a frenzied environment that compels others to join. Fitzpatrick describes the rallies that some large MLMs hold as designed to fuel emotions over thought. “There’s Rocky on the machine and a motivational speaker. There are flags waving. Its ‘Rah Rah Rah!’ and ‘Go go go!’ Don’t look too closely at how much of this stuff gets sold. . . There’s a psychology of euphoria.”

Sproul claims that “The atmosphere [in the office] was euphoric for people who put their money in.”

“You start seeing the dollar signs, not thinking. . . ” says Bill Thornton, professor of psychology, who like Artz teaches consumer behavior at USM. “You may be put into a state called mindlessness where you’re not critically thinking.”

Artz agrees. “The social influence creates a climate that persuades people without fully analyzing the facts,” she says.

Taylor says one tactic that pyramids use to recruit is to plant the idea that there is a sense of urgency to joining the organization.

Mairano reports that the presenter at Leverage135 stressed that “they were going to go public in a few weeks” and Mairano could get in on this opportunity if he acted quickly.

Pyramid schemes need to employ methods to create a mindless atmosphere because a close examination reveals that beneath the persuasion, pyramids, like the emperor from the story, are quite naked. According to Fitzpatrick, unlike a business, “pyramids don’t generate wealth, they only transfer money.” Like the stock market, they rise and fall with consumer expectation, but when one purchases a stock one owns a piece of a legitimate company that owns assets, hardware, and goods. An investment in a pyramid is an investment in hype, and when the hype fails, the pyramid topples.

“They are,” says Fitzpatrick, “the ugly side of the American Dream.”

Noah Bruce can be reached at nbruce@phx.com.