Pyramid Scam

Harry Edwards

(Investigator 99, 2004 November)

In August 2004, I received a letter from a Mr Rhodes of Perth. In it he detailed his hard luck story lost his job, was deep in debt, his car and home repossessed. Then in January 1998 he received a letter telling him how to make over $70,000 at a time. He tried it and it worked. In 1999 he paid cash for a brand new Mercedes, built a $700,000 dream home, took his family on a cruise and didn't owe a cent.

He continues with, "The business plan works perfectly every time. To date I have made over $1,100.000."

Convincing for the doubters were the lines, "This is a legitimate business and perfectly legal. It does not require you to sell anything." "The money you send is a 'gift' and you are operating within the law." "EVERYONE is a winner!"

With the blurb were detailed steps on what to do, three testimonials from past participants with incomplete addresses, and five names and addresses of the current participants.

On comparing Mr R's claims with the information and figures provided, it can be seen that his "business plan" was a pyramid scheme whereby the initiator at the apex is the only one likely to benefit at the expense of those at the base.

Despite Mr R's assurance, EVERYONE cannot be a winner. Money must be generated to pay the winners and logically the money must come from the losers.

To earn the $77,000 you have to participate in the plan detailed below and move up to the first position.

Some doubt can be cast on the validity of the testimonials. First, without addresses they cannot be authenticated. Second, as Mr R doesn't give out his address how could these people have sent him their testimonials?

In respect of the new list of participants, although they include addresses are they genuine? Even if they were contacted and confirmed as genuine they could well be confederates of Mr R or aliases. I note too, that the amounts allegedly won or quoted all ended in odd figures – $71,739, $73,782, and $71,953. As all the "gifts" are $10 notes all the amounts quoted should be multiples of 10 and end in a zero.

So how does the "business" work?

Mr R sends his blurb to 200 people. The names of the alleged participants could be aliases (where box numbers are used, the mail is then forwarded to Mr R). Or they could be confederates who will share in the loot. Mr R puts his alias' name at No 5. The sucker who will then take his place on the list at No 5 sends $10 to No 1 and mails 200 letters.

As the plan progresses Mr R at position 5 moves up the list and cops the lot when he reaches No 1 position. The rest of the newcomers on the list are suckers who have a snowflakes chance in hell of receiving anything!

Mr R assumes a 3% response. If this is correct, let's see how the scheme works.

First Mr R adopts five aliases or co-opts four confederates. We'll call them A, B, C, and D, with himself as E.

He sends out 200 letters with the fictitious names and addresses as alleged participants.

3% (that is 6 out of 200) respond. A receives 6 x $10 ($60) and is removed from the list. Sucker No 1 is added.

B    C    D    E    Sucker No 1

Six people then send 200 letters each – 1200 letters.

3% respond. B receives 36 x $10 ($360) and is removed from the list. Sucker No 2 is added.

C    D    E    Sucker No 1    Sucker No 2

Thirty-six people then send 200 letters each – 7,200 letters.

3% respond. C receives 216 x $10 ($2,160) and is removed from the list. Sucker No 3 is added.

D    E    Sucker No 1    Sucker No 2    Sucker No 3

Two hundred and sixteen people send 200 letters each 43,200 letters.

3% respond. D receives 1296 x $10 ($12,960) and is removed from the list.

Sucker No 4 is added.

E    Sucker No 1    Sucker No 2    Sucker No 3    Sucker No 4

Twelve hundred and ninety-six people send 200 letters each – 259,200 letters.

Three per cent respond (7,776 with $10 each) and E, alias Mr R, collects $77,760.

Making the total potential amount that could be ripped off $93,300.

With E removed, the five remaining participants will probably receive nothing because they'll start running out of people to participate. The next level would require 7,776 x 200 = 1,550,200 letters to be sent. And the level after that requires over 10 million letters! All pyramid schemes operate on the same basis.

To make $1.1 million, which Mr R claims he made, you would have to complete the plan and end up in the number one position 14 times. Add to this the three participants who are alleged on page 4 to have won, this makes a total of 17 winners.

This means that over 4,000,000 letters would have had to be circulated to names and addresses taken from the telephone directory.

The Department of Fair Trading has exposed the scam. On Sydney's Channel Ten on September 27, Australia Post reported that it had intercepted 70,000 of the chain letters, which were alleged to be only the tip of the iceberg.

It was also mentioned that although the initiator referred to the ten-dollar bills as "gifts" there is a $200,000 fine for running a pyramid scam.

The scam differed slightly from my assessment in so far as Mr R's name was at the top of the list. This means that the first ten dollars from all the victims went straight to him.

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