In The Dream Merchant, Jim made his money in fraudulent ways. Aided by his business partner Marvin Gessler, who was the mastermind of the fraud, Jim made millions through elaborate pyramid schemes.
Pyramid schemes rely on recruiting buyers who then recruit other buyers and so on. The original buyer, the con man, needs other buyers to generate sales before he starts to make money. As each new recruit pays, the original buyer gets a cut. The scheme quickly collapses once the people at the bottom cannot recruit buyers and the money does not pay out. The Wealth Pools International scandal in 2007 is an example of a complex pyramid scheme. Wealth Pools claimed to sell foreign language DVDs through a global network of salespeople. New salespeople purchased DVDs that they would try to sell for profit, but these salespeople only saw profits when they recruited new salespeople, not from DVD sales. The scheme affected nearly 70,000 people in 64 countries and cost participants $132 million in 2007 alone.
Illegal pyramid schemes share similarities to multi-level marketing (MLM) strategies, which are legal in the USA. The key difference is that although MLM companies, such as Mary Kay Cosmetics, allow sales people to earn sales from those they have recruited, they can also earn money by selling to members of the general public who are free to buy the products without having to first join the MLM scheme. Despite the recognized legality of MLM businesses, there is considerable blurring of the lines. The Federal Trade Commission provides a useful distinction: "Multilevel marketing programs, unlike pyramid schemes, have a real product to sell. More importantly, MLM's actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM's may pay commissions to a long string of distributors, but these commission are paid for real retail sales, not for new recruits."
Though pyramid and ponzi schemes are often confused, they are different fraud schemes. Pyramid schemes use sales and recruits to generate cash flow for the con man. Ponzi schemes are investment schemes that pay its investors from the investors' own money, rather than from profit from investments made by the con man operating the scheme. The con man keeps the profits himself. Ponzi schemes are often enticing because they offer short-term returns that are unusually high and frequent. The scheme falls apart when the con man is unable to find more investors because the success of the operation relies on a steady stream of investors to provide funding.
The Bernie Madoff scandal is an example of a ponzi scheme. Madoff, the former non-executive Chairman of the NASDAQ, and the founder of Bernard L. Madoff Investment Securities LLC, admitted in his March 2009 guilty plea that the basis of his scheme was to deposit client money in a Chase account rather than invest it. When the clients wanted their money, he said, "I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds." It is estimated that the fraud cost investors close to $18 billion. He was sentenced to 150 years in prison, the maximum allowed.
This article is from the April 17, 2013 issue of BookBrowse Recommends.
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