Too Good to Be True

It’s a saying that we’ve all heard before. “If it sounds too good to be true, it probably is.” So why do millions of people fall for fraud every year?

There are many reasons people fall for tall tales or get swindled. It has been happening since the dawn of humanity, and it continues today. The internet has probably made it even easier for con artists to set up shop and sweep the web for an unsuspecting mark. Yes, even people you would consider smart or savvy sometimes find themselves hooked by the sales pitch of a convincing con artist.

Some of the reasons so many people fall for what some see as an unbelievable, obvious con (see: George C. Parker, who sold Madison Square Garden and the Statue of Liberty; he also sold the Brooklyn Bridge, TWICE) is because we are trusting in nature. Especially if the con artist is someone we know, trust, or relate to. Many of us also have a fear of missing out (F.O.M.O). A good swindler plays on this emotion by telling us to act now while the getting is good. Often in this case, the swindler will tell you how the investment is rising in value so you will want to act quickly so you can get the most return. Or maybe there is a limited supply.

A lot of times people have fallen victim to a scam because someone they know also fell for it. The close contact might have even unwittingly pulled them in by telling them, “Look at this great investment I’ve made! You should get in on this.” Most pyramid schemes and Ponzi schemes work this way. Then there are the scams that play off our emotions. Like when there are natural disasters and people naturally want to help, but then a crook ends up being the real benefactor of the charity. Or worse, you are desperate because you are, or someone you love is, sick and along comes Dr. McFraud with some snake oil.

My favorite common schemes to read about are pyramid and Ponzi schemes because they are so interesting, and, because they have elements in common with legal practices, they can sometimes be difficult to detect. This is probably why they are so popular. They are very similar to each other, but Ponzi schemes generally deal with investments and promise high dividends with “low risk” for the investors. Pyramid schemes differ in that they rely on referrals. Once the referrals dry up, the whole pyramid tumbles because the base is too small to support payments to those at the top. Pyramid schemes operate by redistributing money from lower, or newer, suckers to pay higher-up-in-the-pyramid suckers who had participated longer. So, when not enough new recruits can be found to pay the returns for everyone higher on the ladder, people don’t get the money they expected to receive. Subsequently, they want out of the pyramid, causing the whole thing to end in spectacular fashion. Pyramids tend to collapse after only a short period of time. Unfortunately, people tend to reach out to their friends and family as the folks that join under them, sometimes leading to strained or damaged relationships.

Multi-level marketing (MLM) is similar to a pyramid scheme, but, unlike pyramid schemes, it is completely legal. Everyone is probably familiar with at least one MLM company (Mary Kay, LuLaRoe, doTERRA, etc.). In legitimate MLM companies, making money doesn’t solely rely on recruitment of others. It only increases the take because money can still be made when something tangible can be sold. Ponzi schemes tend to last longer than pyramid schemes because, when a user tries to take money out, the conspirator tries to get that person to “rollover” their investment into a new plan where money cannot be withdrawn for a period of time, often in exchange for higher returns. As Bernie Madoff discovered, the punishment for this crime is severe. When the economy tanked in 2008 and people wanted their money they had “invested” with him, he quickly ran out of money, and a lot of people lost everything. Ol’ Bernie was sentenced to 150 years in prison and was ordered to pay $17 billion, yes, BILLION, in restitution.

Some indicators to identify pyramid schemes according to the Better Business Bureau (bbb.org):

• Are you required to "invest" a large amount of money up front to become a distributor? Legitimate MLM businesses do not require a large startup cost.
  
• If you do have to pay for inventory, will the company buy back unsold inventory? Legitimate MLM companies will offer and stick to inventory buy-backs for at least 80% of what you paid.
  
• Is there any market demand for the product or service? MLM depends on establishing a market for the company's products. If the company doesn't seem to have any interest in consumer demand for its products, don't sign up.
  
• Is there more emphasis on recruitment than on selling the product or service? If recruitment seems to be the focus of the plan, don't sign up.
  
• Is the plan designed so that you make more money by recruiting new members rather than through sales that you make yourself? This is the signature of a pyramid scheme operation.

Hallmarks of Ponzi schemes according to Investor.org (US Securities and Exchange Commission):

• High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  
• Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
  
• Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
  
• Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  
• Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
  
• Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
  
• Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.

There is no shortcut to financial gain. If there was, everyone would be rich. Just like there is no magic pill for weight loss. The only way to reap the rewards is to put in the work. If it sounds too good to be true, it probably is.