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        Ponzi Schemes, Pyramid Schemes and MLM Scams. Are these businesses legitimate: Xango, Prepaid Legal, Quixtar?

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        Another AHBBO Article
        A Pyramid By Any Other Name Will Still Come Tumbling Down

        "Three Days, Three People, Retire in 30 days!

        Make no mistake, People will start BEGGING you to sponsor
        them in!

        Take a look at this Income Projection Chart:

        Level | # of Days | # Benefactored | Income Projection
        1                3                    3                           $70
        2                6                    9                          $130
        3                9                   27                          $290
        4               12                   81                         $660
        5               15                  243                       $1520
        6               18                  729                       $3520
        7               21                 2,187                      $8160
        8               24                 6,561                    $18,880
        9               27                19,683                    $43,520
        10             30                 59,049                   $99,840
        11             33                177,147                 $227,840
        12             36                531,441                 $517,120
        13             39               1,594,323             $1,167,360

        Days add up in a hurry and so does your downline!"

        OK people ... I know how tempting this looks but REALITY check
        time.  This is but one example of a number of "wealth generation
        programs" currently being touted online.  The idea is that you
        must find three people who want to join this program, you pay
        $20 to "benefactor" each of them into the program (for a total
        "investment" of $60) and you're set for life.  Oh, and you have
        to do it in three days.  Each of your three, if they are to remain
        in the game and thereby derive the same wondrous riches from
        the program as you, must also find three people, benefactor
        them into the program (again within three days) and their
        three must find their three in three days and so on.

        And, because non-performers are booted from the program,
        so the theory goes, the only people getting paid are the
        ones actively benefactoring in their own recruits, each of
        whom down the line contributes their "investment" of $60.

        THE "PRODUCT"

        The product each person gets for their $60 (because this is
        NOT, of course, a PYRAMID SCHEME - banish the thought!) is:

        "Software entitled "Building an MLM Empire using the Internet",
        in which you Own Full Licensed Retail Rights to Market the
        software. Retail Value $29.95 All Sales Are Final-No Refunds!"

        OK, three points on the "product". 

        First, your investment is $60.  The product is worth (let's give
        them the benefit of the doubt) $29.95.  HELLO!?   But you get
        RESELL RIGHTS!, I hear you protest.  That makes it more
        valuable than just the purchase price of the product itself.  Oh
        yeah?  Well, you HAVE to be able to sell the product otherwise
        the whole scheme ... er ... program would be nothing more than
        a wealth distribution arrangement wouldn't it?  And that's
        against the law, and we couldn't have that.

        Second, this is not "software", it's an e-Book. 

        Third, the title of the e-Book deviously and insidiously implies
        a relationship between this "wealth creation program" and MLM
        (multi-level marketing).  MLM is a different thing altogether. 
        For a more detailed explanation of what MLM is and what it is
        not, read "Not MLM! ...  Why ever not?" at


        OK, so what about these "wealth creation programs" then? 
        Sounds like a great idea, right?  Everybody wins!  Well, think
        about this ... if everyone goes out and gets three people who
        each have to throw $60 into the pot for their three, everybody
        up and down the line has effectively contributed $60 and that's
        all there is in the pot.  How do you get more than your $60

        Ahah! you cleverly point out, those who don't recruit ... er ...
        "benefactor in" ... er ... SELL (yeah, that's it, SELL) the "product"
        to their three gets dropped, don't they, so now the $20 their
        benefactor contributed for them to join the program is still in the
        pot but they're not.  They've forfeited their investment.  THAT'S
        how we make money. 

        OK!  Very good.  I can see you're paying attention.

        Just one, teensy little problem with this brilliant plan. 

        It's B.S..  It's a pyramid scheme and it's ILLEGAL.


        In her prepared statement to the International Monetary Fund's
        seminar on "Current Legal Issues Affecting Central Banks" in
        May 1998, Debra Valentine, General Counsel for the U.S. Federal
        Trade Commission, had this to say about pyramid schemes:

        "What is striking about these schemes is that while they are
        very old forms of fraud, modern technology has vastly
        multiplied their potential for harming our citizens.  The Internet
        in particular offers pyramid builders a multi-lane highway to
        world-wide recruits in virtually no time.

        "What is a Pyramid Scheme and What is Legitimate Marketing?

        "Pyramid Schemes now come in so many forms that they may
        be difficult to recognize immediately.  However, they all share
        one overriding characteristic.  They promise consumers or
        investors large profits based primarily on recruiting others to
        join their program, not based on profits from any real
        investment or real sale of goods to the public.  Some schemes
        may purport to sell a product, but they often simply use the
        product to hide their pyramid structure.  There are two tell-
        tale signs that a product is simply being used to disguise a
        pyramid scheme: inventory loading [recruits are forced to buy
        more product than they could possibly sell] and a lack of
        retail sales [sales are made only between people inside the
        pyramid, not to the public in general - sound familiar?]. ...

        "[P]yramids are quite seductive because they may be able to
        deliver a high rate of return to a few early investors for a
        short period of time.  Yet, .. pyramid .. schemes are illegal
        because they inevitably must fall apart.  No program can
        recruit new members forever.  Every pyramid .. scheme
        collapses because it cannot expand beyond the size of the
        earth's population.  [Footnote 3: "Assume a pyramid scheme
        in which each person recruits 10 new people.  There would
        be one person at the top, 10 beneath her, 100 beneath them
        and so forth.  The pyramid would involve everyone on earth in
        just 10 layers of people with one con artist on top.  The
        bottom layer would have more than 4.5 billion people."]
        When the scheme collapses, most investors find themselves
        at the bottom, unable to recoup their losses.

        "Some people confuse pyramid .. schemes with multilevel
        marketing.  ... [U]nlike pyramid .. schemes, MLM's 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 commissions are paid for
        real retail sales, not for new recruits."

        Now consider how our "wealth distribution program" above
        works.  Which is it, do you think?  Pyramid scheme or MLM? 
        Bzzzz ... time's up.  All who think it's a classic pyramid go
        to the top of the class.


        Not surprisingly, the U.S. Federal Trade Commission ("FTC")
        pays close attention to so-called MLM's that are, in reality,
        nothing more than pyramid schemes.  It regularly prosecutes
        the promoters of such schemes, obtaining injunctions and
        orders freezing the assets of the promoters to be applied
        in redress of victims.  If you knowingly participate in a
        pyramid scheme, you too can be named as a defendant in
        such an action.

        Bear in mind that as a distributor (whether you're participating
        in a legitimate MLM program or an illegal pyramid scheme),
        you're legally responsible for the claims you make about the
        company, its products and business opportunities.  It is no
        defense that you're merely rehashing the same old
        representations made to you by the company.  The FTC can
        require you to verify the research behind any claims you make.
        For more on the subject of representations and your
        obligation to be able to back them up, read "Not Just Six Lines ...
        65 Characters" at http://www.shelteredturtle.com/adsftc.html .

        In addition, if you solicit new distributors, heed the FTC's
        warning in its Consumer Alert, "The Bottom Line About
        Multilevel Marketing Plans": "You are responsible for the claims
        you make about a distributor's earnings potential.  Be sure to
        represent the opportunity honestly and avoid making
        unrealistic promises.  If those promises fall through, remember
        that you could be held liable."

        Finally, here's the FTC's tips for evaluating a multilevel
        marketing opportunity:

        "1.  Avoid any plan that includes commissions for recruiting
        additional distributors.  It may be an illegal pyramid.  [And,
        by the way, calling it "benefactoring" won't help.  Just a
        handy hint ...]

        "2.  Beware of plans that ask new distributors to purchase
        expensive products and marketing materials.  These plans
        may be pyramids in disguise.

        "3.  Be cautious of plans that claim you will make money
        through continued growth of your downline, that is, the
        number of distributors you recruit.  [Don't take this tip out
        of context - by definition, the more people you have in
        your downline, the more you'll legitimately make in MLM. 
        What the FTC is saying here is to watch out if the plan
        rewards you for recruiting per se, rather than paying you
        a commission on sales of product to the general public
        generated by your downline.]

        "4.  Beware of plans that claim to sell miracle products or
        promise enormous earnings.  Ask the promoter to
        substantiate claims.

        "5.  Beware of shills - "decoy" references paid by a plan's
        promoter to lie about their earnings through the plan.

        "6.  Don't pay or sign any contracts in an "opportunity
        meeting" or any other pressure-filled situation.  Insist on
        taking your time to think over your decision.  Talk it over
        with a family member, friend, accountant or lawyer.

        "7.  Do your homework!  Check with your local Better
        Business Bureau and State Attorney General
        about any plan you're considering - especially when the
        claims about the product or your potential earnings seem
        too good to be true.  [Don't rely too much on the BBB
        though - companies pay to be listed with them so they're
        not as authoritative and independent as they seem.  Asking
        whether they have complaints on file about your particular
        program is worthwhile, however.]

        "8.  Remember that no matter how good a product and how
        solid a multilevel marketing plan may be, you'll need to
        invest sweat equity as well as dollars for your investment
        to pay off."

        By testing any opportunity against the above tips, you'll
        go a long way to ensuring that what you're getting yourself
        into is a legitimate MLM program and not an illegal pyramid.
        Probably the best gut check of them all though is the good
        old "if it sounds too good to be true, it probably is". 

        Hmm ... $1.1m in 39 days for an investment of $60 ...
        somehow, I JUST don't think so ...


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