WEBVTT

00:00:07.104 --> 00:00:08.594
In 2004,

00:00:08.594 --> 00:00:10.674
a new company called Vemma Nutrition

00:00:10.674 --> 00:00:13.434
started offering a life-changing 
opportunity

00:00:13.434 --> 00:00:17.104
to earn full time income 
for part time work.

00:00:17.104 --> 00:00:19.184
Vemma’s offer was open to everybody,

00:00:19.184 --> 00:00:22.904
regardless of prior experience 
or education.

00:00:22.904 --> 00:00:25.374
There were only two steps to start 
get started earning:

00:00:25.374 --> 00:00:29.434
purchase a $500-600 kit 
of their liquid nutrition products,

00:00:29.434 --> 00:00:32.584
and recruit two more members 
to do the same.

NOTE Paragraph

00:00:32.585 --> 00:00:34.845
Vemma Nutrition Company grew quickly,

00:00:34.845 --> 00:00:36.395
becoming a global operation

00:00:36.395 --> 00:00:41.145
that brought in 30,000 new members 
per month at its peak.

00:00:41.145 --> 00:00:42.841
There was just one problem—

00:00:42.841 --> 00:00:48.611
while the company generated $200 million
of annual revenue by 2013,

00:00:48.611 --> 00:00:52.865
the vast majority of participants 
earned less than they paid in.

NOTE Paragraph

00:00:52.865 --> 00:00:56.226
Vemma was eventually charged with 
operating a pyramid scheme:

00:00:56.226 --> 00:00:57.556
a common type of fraud

00:00:57.556 --> 00:00:58.826
where members make money

00:00:58.826 --> 00:01:01.736
by recruiting more people to buy in.

NOTE Paragraph

00:01:01.736 --> 00:01:04.606
Typically, the founder solicits an initial
group of people

00:01:04.606 --> 00:01:06.956
to buy in and promote the scheme.

00:01:06.956 --> 00:01:08.896
They are then encouraged to recruit others

00:01:08.896 --> 00:01:12.116
and promised part of the money 
those people invest,

00:01:12.116 --> 00:01:14.996
while the founder also takes a share.

00:01:14.996 --> 00:01:17.846
The pattern repeats for each group 
of new participants,

00:01:17.846 --> 00:01:21.946
with money from recent arrivals funneled 
to those who recruited them.

00:01:21.946 --> 00:01:23.795
This differs from a Ponzi scheme,

00:01:23.795 --> 00:01:25.605
where the founders recruit new members

00:01:25.605 --> 00:01:28.915
and secretly use their fees to 
pay existing members,

00:01:28.915 --> 00:01:32.465
who think the payments come 
from a legitimate investment.

NOTE Paragraph

00:01:32.465 --> 00:01:34.445
As a pyramid scheme grows,

00:01:34.445 --> 00:01:37.905
it becomes increasingly difficult for new 
recruits to make money.

00:01:37.905 --> 00:01:42.225
That’s because the number of participants
expands exponentially.

00:01:42.225 --> 00:01:46.965
Take a structure where each person has 
to recruit six more to earn a profit.

00:01:46.965 --> 00:01:49.400
The founder recruits six people to start,

00:01:49.400 --> 00:01:51.810
and each of them recruits six more.

00:01:51.810 --> 00:01:54.940
There are 36 people in that second
round of recruits,

00:01:54.940 --> 00:01:57.490
who then each recruit 6 people—

00:01:57.490 --> 00:02:01.150
a total of 216 new recruits.

00:02:01.150 --> 00:02:03.100
By the twelfth round of recruiting,

00:02:03.100 --> 00:02:07.100
the 2.1 billion newest members 
would have to recruit

00:02:07.100 --> 00:02:11.000
over 13 billion more people total 
to make money–

00:02:11.000 --> 00:02:14.120
more than the entire world population.

00:02:14.120 --> 00:02:15.250
In this scenario,

00:02:15.250 --> 00:02:16.750
the most recent recruits,

00:02:16.750 --> 00:02:19.850
over 80% of the scheme’s participants,

00:02:19.850 --> 00:02:22.480
lose all the money they paid in.

00:02:22.480 --> 00:02:23.940
And in real life,

00:02:23.940 --> 00:02:27.030
many earlier joiners lose out too.

NOTE Paragraph

00:02:27.030 --> 00:02:29.820
Pyramid schemes are illegal 
in most countries,

00:02:29.820 --> 00:02:31.910
but they can be difficult to detect.

00:02:31.910 --> 00:02:34.259
They are presented as many 
different things,

00:02:34.259 --> 00:02:36.049
including gifting groups,

00:02:36.049 --> 00:02:39.679
investment clubs, and multi-level 
marketing businesses.

00:02:39.679 --> 00:02:44.119
The distinction between pyramid schemes 
and legitimate multi-level marketing

00:02:44.119 --> 00:02:46.089
can be particularly hazy.

00:02:46.089 --> 00:02:47.659
In theory, the difference is that

00:02:47.659 --> 00:02:50.239
the members of the multi-level 
marketing companies

00:02:50.239 --> 00:02:54.619
primarily earn compensation from selling
a particular product or a service

00:02:54.619 --> 00:02:56.103
to retail customers,

00:02:56.103 --> 00:03:01.063
while pyramid schemes primarily compensate
members for recruitment of new sellers.

00:03:01.063 --> 00:03:02.380
In practice, though,

00:03:02.380 --> 00:03:05.670
many multi-level marketing companies make 
it all but impossible

00:03:05.670 --> 00:03:08.400
for members to profit purely 
through sales.

00:03:08.400 --> 00:03:11.510
And many pyramid schemes, 
like Vemma Nutrition,

00:03:11.510 --> 00:03:15.320
disguise themselves as legal multi-level
marketing businesses,

00:03:15.320 --> 00:03:19.790
using a product or service to hide the
pay-and-recruit structure.

NOTE Paragraph

00:03:19.790 --> 00:03:25.413
Many pyramid schemes also capitalize 
on already existing trust within churches,

00:03:25.413 --> 00:03:28.611
immigrant communities, 
or other tightly knit groups.

00:03:28.611 --> 00:03:32.291
The first few members are encouraged 
to report a good experience

00:03:32.291 --> 00:03:34.641
before they actually start 
making a profit.

00:03:34.641 --> 00:03:37.171
Others in their network follow 
their example,

00:03:37.171 --> 00:03:39.311
and the schemes balloon in size

00:03:39.311 --> 00:03:43.521
before it comes clear that most members
aren’t actually profiting.

00:03:43.521 --> 00:03:46.766
Often, the victims are 
embarrassed into silence.

00:03:46.766 --> 00:03:51.176
Pyramid schemes entice people with the
promise of opportunity and empowerment.

00:03:51.176 --> 00:03:53.586
So when members don’t end up making money,

00:03:53.586 --> 00:03:56.566
they can blame themselves 
rather than the scheme,

00:03:56.566 --> 00:04:00.326
thinking they weren’t tenacious enough 
to earn the returns promised.

00:04:00.326 --> 00:04:02.076
Some victims keep trying,

00:04:02.076 --> 00:04:04.146
investing in multiple schemes,

00:04:04.146 --> 00:04:06.636
and losing money each time.

NOTE Paragraph

00:04:06.636 --> 00:04:08.472
In spite of all these factors,

00:04:08.472 --> 00:04:11.492
there are ways to spot a pyramid scheme.

00:04:11.492 --> 00:04:13.772
Time pressure is one red flag—

00:04:13.772 --> 00:04:19.232
be wary of directives to “act now or 
miss a once-in-a-lifetime opportunity.”

00:04:19.232 --> 00:04:24.392
Promises of large, life-altering
amounts of income are also suspect.

00:04:24.392 --> 00:04:28.170
And finally, a legitimate multi-level 
marketing business

00:04:28.170 --> 00:04:33.440
shouldn’t require members to pay for the
opportunity to sell a product or service.

NOTE Paragraph

00:04:33.440 --> 00:04:37.380
Pyramid schemes can be incredibly 
destructive to individuals,

00:04:37.380 --> 00:04:40.980
communities, and even entire countries.

00:04:40.980 --> 00:04:42.830
But you can fight fire with fire

00:04:42.830 --> 00:04:45.560
by sending this video to three 
people you know,

00:04:45.274 --> 00:04:48.564
and encouraging them to do the same.