by Elizabeth M Young

Created on: July 23, 2010

A pyramid scam generally works on the principle of getting new customers to invest money that is paid to older customers. A pyramid scheme starts with a few customers who get great returns on their investment. As word of mouth spreads, more investors are added and their investment dollars go straight to the top. The money does not go to legitimate investment activities but to the earlier customers who are at the "top" of the pyramid. This process usually takes enough "seed money" to fool the first investors or to pay off those first investors who want to be paid.

The top group may or may not be knowledgeable of the pyramid scheme and will recruit additional victims of the scam. Recruitment is enhanced by paying incredible returns on the early investments, along with other factors that are designed to convince people. These factors include impressive offices, forged certifications and other symbols of power, wealth and efficiency. More victims recruit more victims until there is a much larger base that is investing while there is a much smaller top that is reaping the rewards. There is no external income, so the pyramid eventually collapses when it becomes clear that the money is gone.

Sales pyramid scams:

In some cases, the pyramid is created as part of a selling program where the first salespeople pay a startup fee, must buy their products from the company, have to send up part of their gross income, and even may have to give up their customer lists. Then they are directed and/or pressured to recruit their own posse of subordinate salespeople. The company could sell online or by mail order to the customers that the victim worked hard to get. The first customers, of course, have a great experience and make great profit.

Then each layer on the pyramid takes a cut of subordinate seller's sales income and passes the rest onward to the top of the pyramid. When those at the bottom eventually realize that they are not making any return on their "investments", it is too late. The money has been disbursed and it will take lengthy court and law enforcement battles, with little hope of getting even a portion of the original investment back.

High level Investment pyramid scams:

More "investors" are piled on, each investing money that goes to the scammers and to a few previous investors and not to any activity that creates actual income. This goes on until there is a huge "base" of investors that

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