Anaheim Police Investigate Alleged Pyramid Scheme

Two city residents are under investigation for allegedly running a pyramid scheme that has duped at least 30 people out of thousands of dollars, and police said Friday that they hope to obtain arrest warrants next week.

Police said the investigation into the scheme began about two weeks ago after they received telephone calls from alleged victims who wanted their money back and from potential participants wanting to know if the transactions were legal.

The investments took place at “pyramid parties” held twice a week at an Anaheim residence on North Robwood Circle over the past six weeks, said Sgt. Steve Walker.

“Some called to say they had heard about it and wanted to know if it was legal,” Walker said. “But about half of them had already lost money and just wanted it back.”

As many as 30 people met at the home on Tuesdays and Thursdays and were invited to invest $100, $200 or $2,000 in one of three pyramid schemes. The attendees were promised a return eight times their investment, Walker said.

“They don’t realize that this is illegal and that the only ones making money are the ones on top [of the pyramid],” he said. “Everyone else are losers.”

Walker said that at least three other alleged pyramid schemes are also under investigation.

Neal Stoughton, associate professor of finance at UC Irvine, said that a pyramid scheme creates the illusion of financial success by paying off early investors with funds provided by later investors. The scheme eventually collapses when no more investors can be found.

“There’s only a finite number of people in the world, with so much money, so it has to collapse sometime,” Stoughton said. “The question is when and whether you will be the person it collapses upon.”

Pyramid schemes--also known as investment groups or gift clubs--can be compared to chain letters, Stoughton said.

“You join in and then you try to lure others too,” he said. “Anybody who wants to engage in that would be better off participating in the California state lottery. And the lottery doesn’t have very good odds.”

Walker said that those who lost money will be treated as “victim witnesses.”

“We’re just trying to get them to give us more information on the inner workings of these parties,” Walker said. “Everybody is in violation, but we’re focusing on the people making thousands of dollars.”

Walker said the suspects could be charged with participating in an endless chain scheme. If convicted of a felony, they each could face a maximum of three years in state prison, he said.

“The sad thing about this is you’ve got all this hope,” Walker said. “You bring in family and friends. The entire family ends up losing money.”

Walker asked that any resident involved in a possible pyramid scheme or who has concerns about questionable investments call Anaheim police at (714) 254-1451.

“We just want to get the word out that pyramid schemes are illegal and you will lose money,” he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Investors, Beware

Phony investment plans called pyramid schemes are also known as gift clubs and investment funds and groups. They promise huge returns but deliver losses.

COMMON QUESTIONS

How do pyramid schemes work?

New investor starts at the bottom, pushing original investor to the top of the pyramid, where profits are made. Original investor splits pyramid in half, creating two new ones. New pyramids still have the original investor on top.

Are pyramid schemes legal?

No. Operating a pyramid is a felony, but it’s not illegal to join one.

What happens to the money after police shut down a pyramid?

Funds are not redistributed to investors.

Who are targeted as victims of these scams?

People of all ages and backgrounds are lured by the appeal of making large sums of money for a small investment.

SCAM SMART

How to detect a possible pyramid scheme:

* Never believe a plan that offers returns seemingly too good to be true.

* Beware of anyone asking for cash investments and promising quick, multiple returns.

* Think twice about an investment that is based on bringing in other people.

* Ignore acquaintances who want you to attend a meeting to get in on a great investment deal.

* Beware if presenters say, “Now, these charts are pyramid-shaped, but this isn’t a pyramid scheme.”

If you think you’re involved in a pyramid scheme, or know someone who is, report the activity to local police.

Source: Santa Ana Police Department

Los Angeles Times