Attorney General's Office Issues Warning: Avoid Illegal Pyramid

The Attorney General's Office believes such schemes are illegal pyramids, and that they pose a danger to persons who join later and will lose their money.

Promoters may claim that the "gift" angle makes it legal, but we believe everyone knows these are not true gifts. The payments are nothing more than investments in a money-making scheme, made for the sole purpose of generating a big cash pay-out to participants.

Illegal pyramids are outlawed for good reason: by definition, any program that relies entirely on constantly multiplying the number of participants is doomed to failure. Pyramids may make quick money for a relatively small group of early promoters, but a far larger group of later participants end up losing their money as the pool of potential recruits dries up. Iowans need to be forewarned that people inevitably lose money in pyramid operations.

We believe the pyramids likely run afoul of several state and federal laws. One illegal aspect is the false claim that the payments are considered to be gifts by the IRS, and that cash pay-outs do not have to be declared as income at tax time. The IRS has indicated that failure to declare such payments could constitute felony tax evasion.

Representations made in promoting participation in the pyramid also may constitute violation of the Iowa Consumer Fraud law and theft-by-deception statute. It appears that promotional materials make false claims about the initial payment being a gift rather than an investment, about the speed with which a large pay-out will be generated (especially for latecomers who have no hope of achieving a pay-out), and about the legality of the scheme itself.

Such pyramids can cause a lot of harm. People would like to believe that there is a legal way to make so much money quickly and easily, and so they recruit relatives, friends, neighbors and co-workers to invest. Then, when the pyramid collapses -- as pyramids always do -- there is a lot of anger as people deal with the losses they suffered and caused others to suffer.

One of the current gifting pyramids is referred to as "The Winners' Team" and another as "Life Changes." Such "gifting" schemes are not new. Earlier versions of similar schemes were called "Friends Helping Friends" and "The Gifting Board," among others. Such operations have been prosecuted criminally under anti-pyramid, theft, lottery, and securities laws. A person who recruits others also may be committing a consumer fraud violation with potential civil penalties up to $40,000.

The Attorney General's Office is cooperating and consulting with other state and U.S. officials on the matter, including Iowa county attorneys, the State Securities Bureau, the Federal Trade Commission and the Internal Revenue Service.

The Attorney General's Office cautions Iowans not to participate in illegal pyramids. People who participate are risking their money, and they also risk violating the law or being sued.

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