In business, there exists a competitive craving to be smarter, faster, and bigger than everyone else. This urge stems from the initial experience of success that has the ability to intoxicate people. If success isn’t approached with correct moral and ethical judgement, this infatuating addiction can prove harmful to the parties involved. This is how notorious and successful businessman Bernie Madoff became involved with one of the most systematically thought out forms of stock fraud; otherwise known as the pyramid scheme. This scheme works exactly as it sounds; like a pyramid. The top investor recruits individuals who will “make money” beneath them if they promise to recruit more investors that will “make money” beneath them, and so on. This scheme works and eventually makes a never ending pyramid of investors that only make money if they recruit more and more investors below them, however the issue is that the pyramid can’t go on forever, and there will be investors sitting at the bottom of the pyramid who will fail to make any money at all while the few people sitting at the top of the pyramid will make exponentially increasing sums of money that stem from the empty promises of the bottom level investors. This practice has now been criminalized and landed Bernie Madoff the title of one of the most notorious criminals in history as well as a 150 year sentence to federal prison. This is where the concept of multi-level marketing comes in. This business concept begins with few individuals who have a product that they want to sell. They then recruit a larger group of individuals below them to sell that product. This group of individuals then recruits more sellers below them and the cycle continues on and on while the original sellers make more and more money. In short, the largest group of sellers at the bottom of the scheme end up with a closet full of products that they are unable to sell while the individuals above them make copious amounts of cash. This business scheme holds an uncanny resemblance to the investment scheme discussed earlier. The only difference is that only one of them is considered illegal in the eyes of the Internal Revenue Service. So if these two business schemes are essentially the same thing with different labels, what is it that separates them in legality?
I found the information very useful in this article by the Better Business Bureau. The hyperlink provided will take you to my hypothes.is annotation of the document. It blatantly states the red flags of multi level marketing schemes that closely resemble the pyramid scheme, or Ponzi Scheme. I found it intriguing how close the qualifying criteria for legal and illegal forms of this marketing seem to be. This article sparked inquiry about how companies can find legal loopholes to disguise unethical marketing schemes as enticing financial opportunities that comply with legal business regulations. I believe this document shows how easy it is for corporations to advertise misleading and many times, fruitless schemes to recruit individuals into their market. The article does state that not all multi-level markets are to be considered “scams,” however many of these product distribution corporations fall into the notorious category.
I found another article very intriguing. This government document gives an overview of how certain corporations target young marketing and finance students as recruitment candidates for their products. It provides numerous guidelines for these students to see if they are being recruited into legitimate market opportunities and not fraudulent organizations. It examines the risk involved with these types of sales positions and the precautions that should be taken before considering them. I found this very helpful in showing the main demographic that is at risk when it comes to these types of schemes.
I am looking forward to researching more on this topic and examining what it is that makes these schemes fall on the spectrum of legality in the eyes of the IRS, and United States Corporate Law.