Complaints about pyramid schemes are hardly new. They
have likely existed for several centuries, but the modern variety can be traced back to the infamous Charles Ponzi, who took in some US$15 million, starting in 1919, when he offered 50% returns in 90 days on investments in his Boston-based Security Exchange Co. He maintained his scheme by paying Paul with Peter’s investments until the deception ultimately imploded. Countless pyramid schemes emerged in the 20th century,
including chain letters, in which recipients would send a dollar to the person named at the top of a list. The recipients would then add their names to the list and send it off to people they knew, who presumably would follow the same instructions. Multilevel marketing schemes soon followed suit. Although
some were genuine and focused on selling a real product, such as Fuller Brush and Mary Kay Cosmetics, many were nothing more than pyramids. Some had no product whatsoever.
Soup’ and ‘Salad’ and eight new people to sign on to the circle will be ‘the Appetizers.’ ” Sounds so innocent and cute. “The 12% who start this have a good chance to grab their
$40,000 and financially empower themselves. They might even promise to help recruit people for you. My bet is that ‘Dessert’ will flash her $40,000 and go out and initiate another circle.” The other 88%, however, “can kiss [their] hard-earned money away as well as some friends.” While the women’s scheme dealt in relatively small numbers,
other Canadian pyramid scams netted far more money. In February 2014, a federal judge awarded $6.5 million to 2,000 investors who put their money into the UltraLife Club through a Mississauga, Ont., corporation called Business In Motion International, CBC News reported. “The company was run by Alan Kippax, who was first exposed in a CBC Marketplace inves- tigation of a pyramid scheme that defrauded investors across
Complaints about pyramid schemes are hardly new A persistent pyramid scheme that has circulated in the past
15 years is aimed at women. Known by various names, such as the Women’s Giſting Circle, it preys on women who believe that they need to empower themselves financially to be free of the controlling involvement of men. The basic concept requires women to invest a certain amount of money and then move upward (and therefore get a greater amount of money back) as more and more women are recruited to join the group. One of many such circles existed in Toronto’s Beach area
around the start of the 21st century. No matter how oſten they were told that unless there was an actual product that generated a profit the pyramid would ultimately collapse, many well-edu- cated women invested considerable sums of money. In 2013, RCMP in northern BC warned that the scam had
reemerged. Staff sergeant Marko Shehovac, commander of the Columbia Valley RCMP detachments, told of a group of eight women who were each asked to contribute $5,000 to the circle. “You are told that there is no promise of obtaining a product
or receiving anything for this wonderful gift,” he wrote in a report. “[It] has to be clear you are giving a giſt to the top person, which will add up to $40,000. [It] must be clear it is a giſt you are giving, so later when you try to sue because you didn’t get your $40,000 as the Circle is intended to do, it was made clear it was a giſt and hence no criminal intent or involvement. Wrong. The circle as described is a criminal act [under the Competition Act].” The concept, he explained, is for each of the eight women to form her own circle, with her at the top. “In the Columbia Valley,” he wrote, “I am hearing that the
person starting the circle wants to be known as ‘the Dessert,’ two below her will be ‘the Entree,’ four below her will be ‘the
Canada, including hundreds from BC.” People attending Kippax’s meetings were asked for a $3,200
fee to buy vacation packages worth $9,000 that they could then sell to others. “Kippax’s vacation packages weren’t even good deals,” the CBC said. “There were cheaper travel packages on the Internet and his business continually needed more recruits to keep profits flowing to those at the top — a scheme the court described as a classic pyramid scheme.” Kippax, who faced other legal problems, was charged with running the scheme (at press time he had not faced any formal legal proceedings). By the end of 2014, Herbalife had also become engaged in
some legal wrangling. In December, Reuters reported that the company had won preliminary court approval of “its US$15- million settlement of class-action litigation accusing [it] of being a ‘pyramid scheme’ that misleads distributors about how much money they can make. The accord also requires Herbalife to provide up to US$2.5 million to distributors who return unused products.” The company didn’t admit any wrongdoing. However, that outcome did not deter Ackman. On January 1,
he announced he will continue his campaign against Herbalife, this time taking it directly to the Hispanic community. While many aspects of the Egyptian pyramids remain a
mystery, consumer pyramid schemes are easier to understand: if there’s a product that makes everyone selling it a reasonable profit, the company is probably legitimate. If the real product is the recruitment of other distributors, it’s not just an illegal pyramid scheme but a house of cards just waiting to collapse.
DAVID MALAMED, CPA, CA•IFA, CPA (ILL.), CCF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto
APRIL 2015 | CPA MAGAZINE | 45
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