In the latest case involving online fraud, the Federal Trade Commission has shut down an Internet pyramid scheme that may have bilked investors of more than $1 million, FTC officials told CNET today.
Late last week, the FTC issued a temporary restraining order against the Mentor Network, a Newport Beach, California, company that used Web sites to solicit money for a children's charity, promising profits to donors. The FTC alleges that, while the Mentor Network did give some funds to a charity, it also swindled more than 2,300 subscribers out of anywhere from $800,000 to $1.5 million through a classic pyramid scheme.
Pyramid schemes, also known as Ponzi schemes, typically recruit investors by promising fantastic profits in exchange for an up-front investment. Once individuals invest money, they are expected to recruit other investors so that funds flow upward to more senior investors from batches of new recruits. Pyramid schemes usually collapse once the money given to investors exceeds the funds coming in from new members.
If it is successfully prosecuted, the Mentor Network would not be the first pyramid scheme to use the Internet as its base of operations. Last June, the FTC closed down an operation run by an Fortuna Alliance, which allegedly defrauded investors of more than $6 million. The FTC has seen a steady rise in other types of Net scams as well, including offers of $24 guides to an AIDS cure and credit card deals.
According to Chuck Harwood, regional director for the FTC's Seattle Office, which issued the restraining order against the Mentor Network, Net pyramid schemes are definitely on the rise, though they are still dwarfed by scams advertised in other media.
"We've certainly seen a number of pyramid schemes on the Net," Harwood said today. "You can reach more consumers [there]. Another reason is that it's a relatively cheap way of disseminating information."
To become a subscriber to the Mentor Network, individuals were required to pay a $24 registration fee to the company, plus $30 per month for one year. A subscriber became eligible to receive a cut of the investments from new recruits by selling subscriptions to at least three other people.
According to the FTC, Mentor Network subscribers advertised the company's program, dubbed MentorVision, on a number of different Web sites throughout the Internet. Today, at least two of those sites were still up and running, including a site called Cuttin Culley's Business Opportunity Showcase, hosted by America Online.
Both sites promise subscribers the chance to give money to a fund for needy children and earn money at the same time.
"Saving a child in need does not have to be an expense anymore...With MentorVision it can be the opportunity of a lifetime," a promotional statement on the Web sites reads. "If you could support dozens, even hundreds of children in need, AND earn a significant income doing it...would you?"
Calls to the Mentor Network's offices were not returned.
The complete text of the FTC's restraining order against the Mentor Network has been posted to a Web site maintained to be the temporary receiver in the case.