A NY Investment Fraud Lawyer Explains Illegal Pyramid Schemes
According to the New York Attorney General “a pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of investors.’”. Pyramid schemes are illegal both in the state of New York and under federal law. A defendant who is charged with operating a pyramid scheme could face decades in prison and could be required to repay investors who lost money as part of the alleged scheme.
There is a fine line between a pyramid investment scheme and a legitimate multi-level marketing opportunity, and in some cases prosecutors and investigators get it wrong and go after people who did not break the law. There are myriad ways to defend yourself if you are accused of involvement in a pyramid scheme scam. Bukh Law Firm, PLLC has the experience and knowledge necessary to help you try to fight charges. To learn more about the legal options available to you and to get advice from a legal advocate dedicated to trying to keep you out of prison, call our New York City investment fraud lawyers today.
What is a Network Marketing Pyramid Scheme?
Network marketing or multi-level marketing business opportunities abound for people who want flexible careers, or who want to work from their homes. Network marketing, or multi-level marketing, relies on person-to-person sales. A small initial investment is made when becoming involved in network marketing. The investor then has the opportunity to sell the product to friends, family, and other contacts. The investor also has the opportunity to get others to sign up to sell the product, and then makes money off of the sales they make.
Multi-level or networking marketing opportunities may be legitimate and some large companies including Avon, Pampered Chef, and Mary Kay distribute their products through network marketing. However, while network marketing is legitimate, there are situations in which a network marketing pyramid scheme is not a viable business opportunity but is instead considered an illegal scam. In FTC v. Koscot Interplanetary, a four part test was created to determine when a multi-level marketing opportunity crosses the line into a network marketing pyramid scheme. The test looks at:
- Whether an investor must pay the company to sell the product.
- Whether the investor receives the right to sell the product or service in exchange for making the payment.
- Whether the investor is compensated for recruiting other investors to pay for the rights to sell the product.
- Whether the compensation that an investor receives is based on recruiting other people to sell the product.
In situations where money is primarily made by finding new sellers, rather than selling the product, the business is more likely to be considered a MLM scheme.
Characteristics of a Pyramid Investment Scheme?
While the Koscot test is generally the key to determining whether a multi-level marketing opportunity is an illegal pyramid scheme, the FTC also describes other red flags that could trigger an investigation or allegations of fraud. These include:
- Promising investors large profits based on recruiting others to sell products.
- Lack of retail sales (the product is used only to try to hide the pyramid scheme and the goal is not to actually try to make a profit from product sales)
- Inventory loading, or requiring new recruits to purchase larger volumes of inventory than they could expect to sell. The inventory is often sold at inflated prices.
Pyramid schemes are similar to Ponzi schemes, but Ponzi schemes do not involve products and no commission is paid for recruiting new investors. Ponzi schemes work by finding new investors through the promise of high rates of return. The money from new investors is then used to repay old investors, with no actual investment ever being made.
Pyramid Scheme Laws: When is a Pyramid Scheme Scam Illegal?
The General Business Law of New York State establishes the criminality of chain distributor schemes in Article 23-A, Section 359-fff. A defendant could also face federal charges for securities fraud offenses; mail fraud; and wire fraud. When the postal service or wire communications are used as part of a pyramid investment scheme, a defendant could face a maximum penalty of two decades of imprisonment under 18 U.S. Code Sections 1341 or 1343.
How an Investment Fraud Lawyer Can Help If You’re Accused of an Illegal Pyramid Scheme
An investment fraud lawyer can help you to defend yourself if you have been accused of participation in an illegal pyramid scheme. Call today to schedule a consultation and learn more about how Bukh Law Firm, PLLC can assist you.
