The Fight Against Crime: Notes From The Front : Pyramids: A Scam Returns for the ‘90s

Folks are always looking for a way to make some easy money.

Credit card scams. Bank robberies. But one of the best known routes to fast cash without working is the infamous pyramid scheme.

Yup, that scam that was so hot in the early ‘80s is back.

In the past seven months, 16 people have been arrested in the San Fernando Valley in connection with pyramid schemes, which sometimes promised as much as a $6,000 payoff for an $800 “investment.”

According to prosecutors, some were part of a ring called “Friends Helping Friends.” Two other groups, “The Platinum Gift Card Club” and “Friends Helping Friends and Family” have also surfaced in the Valley recently.

Last week in the Palm Desert area, nine people, including a school board president and a local college president, were indicted on charges of running a pyramid scheme that allegedly involved more than 1,000 people and the exchange of an estimated $1 million over a year’s time.

“We had a rash of these types of cases in the ‘80s,” said Keith De La Rosa of the city attorney’s Consumer Protection Unit. “They die down for a while and start up all over again.”

The schemes operate on the promise that contributors to a pot of money can swiftly get back more--as much as eight times more--as the number of investors grows. There is no pretense of a product. Investors’ money simply goes directly to pay off those who invested before them. They in turn are supposed to get paid off by those who come after them, but the group has to continue multiplying until the number of investors required is enormous.

An eightfold payoff, starting with 16 participants, needs 65,536 new participants by the fifth generation.

“What victims of these pyramid schemes don’t seem to realize is that only the organizers make a profit,” said City Atty. James K. Hahn. “Those who come along later inevitably lose their money, because there just simply are never enough investors to sustain the pyramid, and it eventually comes crashing down like a house of cards.”

Though some of the larger pyramid schemes hold “investors meetings” in hotels, many are also held in homes across the Valley, from Chatsworth to North Hollywood.

Greg Schwien, a supervisor in the the LAPD’s special fraud section, has been investigating pyramid schemes since the 1970s. Schwien said not only can the scheme operator get 16 months to three years in jail and a fine for actively recruiting others, so too can investors for trying to bring in other friends or relatives--as they usually must do to keep the chain going long enough to collect.

“It’s not a crime to give somebody the money,” Schwien said. “The crime is to bring other people in.”

Since making money off small investments is a universal desire, the schemes attract a wide spectrum of wide-eyed investors from working-class people to retirees. What’s worse, according to De La Rosa and Schwien, is that most of people investing are so poor that they cannot really afford to lose the money.

Hindering investigation of pyramid schemes is the victim’s embarrassment at being a sucker, making them reluctant to complain. The investigators’ best advice: Don’t get involved, no matter how good it sounds.

De La Rosa said most victims are brought in by trusted family members. Ignore tips, even from an uncle or your mother. “It’s a scam from the get-go.”