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Scams & Schemes: Gifting Clubs, Pyramid Schemes and Chain Distributor Schemes

Since mankind first developed a bartering system, unscrupulous characters have been developing get-rich-quick schemes. It is unlikely that these schemes will ever go away. And with the advent of the internet, new twists on the old schemes are being created. Fancy web sites with interactive software give an air of legitimacy to many of these scams. Regardless of the form, con artists are banking on the average person's greedy urge to get rich quick. The most common forms of these scams are gifting clubs, pyramid schemes and chain distributor schemes.

Chain Distributor Schemes

Chain distributor schemes are sales devices whereby a person, in exchange for making an investment, is granted a right to recruit for profit other persons.  The new recruits, in turn,are expected to perpetuate the chain by recruiting additional participants, with prior participants higher in the chain receiving compensation for each new recruitment.  Wisconsin law prohibits the use of chain distributor schemes.

Gifting Clubs and Pyramid Schemes

Gifting clubs are one type of chain distributor schemes, and operate in the same manner as traditional pyramid schemes. An individual joins the club by giving a specific amount (usually $2,000) to the senior member at the top of their "board". Each freshman then needs to recruit four additional individuals to join the board below him/her. As everyone moves up a level on the board, the board splits to create two new boards. Once an individual reaches the senior level, he/she receives a total of $16,000 from the eight individuals at the freshman level. The success of these gifting clubs depends solely on the ability to recruit an ever-expanding number of individuals at the lower level. Thus, the only individuals who receive money back from their initial investments are those few who were lucky enough to enter the club early.

Why These Schemes Are Illegal

Gifting clubs, pyramid schemes and other chain distributor schemes inevitably collapse when no new distributors can be recruited. When a plan collapses, most people, except those few at the very top of the pyramid, lose their money.

In addition to being illegal under Wisconsin consumer protection laws, these types of scams may also constitute illegal lotteries, which are classified as Class E felonies in Wisconsin.

Conclusion

Remember, if it sounds too good to be true, it probably is. And in the case of pyramid schemes and gifting clubs, it may even be a crime.

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