Even Web not immune to pyramid schemes

A new type of "Web opportunity" may sound perfectly legitimate--but authorities are taking action against ploys that have attracted tens of thousands of participants on an international scale.

3 min read
A new type of "Web opportunity" may sound perfectly legitimate--but authorities are taking action against schemes that have attracted tens of thousands of participants on an international scale.

Some very old business practices, when described in new-wave Internet-speak, sound convincing to people in ways that might not fly in the physical world.

In the first six months of this year alone, authorities in the United States, Canada and Australia have shut down a dozen so-called pyramid schemes with names like Equinox International, 2Extreme and The Winner's Circle.

These programs involved "multilevel marketing," in which early investors receive payments from funds contributed by later subscribers.

In one case, between 40,000 and 50,000 subscribers paid fees up to $295 to Web hosting firm Professional Resources System International (PRSI).

According to documents from a Florida court, PRSI's reach was broad. Subscribers joined from more than 80 countries and paid $12.8 million for Web sites that were never launched.

Legitimate e-commerce providers, struggling to enroll enough customers just to break even, might wonder, "How do I get that many people to send me that much money?"

For one thing, you should try to be very, very persuasive that your subscribers are getting in on the ground floor of a killer idea.

Jody Collins, Florida's assistant attorney general, who prosecuted the case against PRSI, said chief executive William Caudell has years of sales experience.

"He's reportedly a remarkable salesman," Collins said, "although he took the Fifth Amendment during our deposition, so I didn't really get to hear him talk."

Mark Cohen, a Florida lawyer who is defending PRSI and several individuals in the case, said his clients would not speak publicly, since there is an ongoing criminal investigation. But he asserted his clients' innocence, saying, "We've disputed the allegations in the complaint." He also said the Florida court had ordered the seizure of PRSI's assets without holding a hearing.

Collins said a hearing with witnesses was held one month after the surprise seizure, and that the court upheld its legality.

Also, you should make sure to promise fantastic benefits to people who sign up.

According to court documents, individuals who paid $295 to PRSI were entitled to sell sites to others. These "cyber managers" received a percentage of the revenue from "downline" sites they sold.

After enrolling six levels of new members, PRSI's pre-launch brochure stated, cyber managers would receive $14,580 per month--enough to retire for life.

Even better, subscribers' sites would be located on a private network called "Intranet i3x." This Web mall would prohibit erotic content, thereby attracting families who would buy products at members' sites.

In case this wasn't enough to make you want your own Web site, PRSI promised to fund "Kids 4 Tomorrow." This foundation would "change the lives of literally hundreds of thousands of children throughout the country and the world."

This all may sound fanciful in hindsight. But telemarketing sales calls and breathless emails made these points seem irresistible to thousands.

"Some people who didn't even own a computer bought memberships," Collins says.

According to statements by the attorneys general of Florida and Louisiana--which assisted in the case--there never was any e-commerce intranet.

"The only way a few purchasers have earned any money from PRSI is by recruiting new members for their downline," said Louisiana Attorney General Richard Ieyoub.

How can you recognize Web pyramid schemes? Collins says if less than 70 percent of a member's revenue comes from the sale of actual products, and more than 30 percent comes from others' revenue, it's probably not a legitimate business.

As always, if something sounds too good to be true, it probably is. Remember this the next time someone says you can retire for life.

Do you know of a problem affecting consumers? Send info to tips@BrianLivingston.com. He'll send you a book of high-tech secrets free if you're the first to submit a tip he prints.