WEBVTT

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In 2004,

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a new company called Vemma Nutrition

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started offering a life-changing 
opportunity

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to earn full time income 
for part time work.

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Vemma’s offer was open to everybody,

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regardless of prior experience 
or education.

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There were only two steps to start 
get started earning:

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purchase a $500-600 starter kit 
of their liquid nutrition products,

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and recruit two more members 
to do the same.

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Vemma Nutrition Company grew quickly,

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becoming a global operation

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that brought in 30,000 new members 
per month at its peak.

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There was just one problem—

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while the company generated $200 million
of annual revenue by 2013,

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the vast majority of participants 
earned less than they paid in.

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Vemma was eventually charged with 
operating a pyramid scheme:

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a common type of fraud

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where members make money

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by recruiting more people to buy in.

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Typically, the founder solicits an initial
group of people

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to buy in and promote the scheme.

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They are then encouraged to recruit others

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and promised part of the money 
those people invest,

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while the founder also takes a share.

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The pattern repeats for each group 
of new participants,

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with money from recent arrivals funneled 
to those who recruited them.

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This differs from a Ponzi scheme,

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where the founders recruit new members

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and secretly use their fees to 
pay existing members,

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who think the payments come 
from a legitimate investment.

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As a pyramid scheme grows,

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it becomes increasingly difficult for new 
recruits to make money.

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That’s because the number of participants
expands exponentially.

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Take a structure where each person has 
to recruit six more to earn a profit.

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The founder recruits six people to start,

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and each of them recruits six more.

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There are 36 people in that second
round of recruits,

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who then each recruit 6 people—

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a total of 216 new recruits.

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By the twelfth round of recruiting,

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the nearly 2.2 billion newest members 
would have to recruit

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over 13 billion more people total 
to make money–

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more than the entire world population.

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In this scenario,

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the most recent recruits,

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over 80% of the scheme’s participants,

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lose all the money they paid in.

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And in real life,

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many earlier joiners lose out too.

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Pyramid schemes are illegal 
in most countries,

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but they can be difficult to detect.

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They are presented as many 
different things,

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including gifting groups,

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investment clubs, and multi-level 
marketing businesses.

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The distinction between pyramid schemes 
and legitimate multi-level marketing

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can be particularly hazy.

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In theory, the difference is that members 
of multi-level marketing companies

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primarily earn compensation from selling
a particular product or a service

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to retail customers,

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while pyramid schemes primarily compensate
members for recruitment of new sellers.

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In practice, though,

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many multi-level marketing companies make 
it all but impossible

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for members to profit purely 
through sales.

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And many pyramid schemes, 
like Vemma Nutrition,

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disguise themselves as legal multi-level
marketing businesses,

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using a product or service to hide the
pay-and-recruit structure.

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Many pyramid schemes also capitalize 
on already existing trust within churches,

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immigrant communities, 
or other tightly knit groups.

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The first few members are encouraged 
to report a good experience

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before they actually start 
making a profit.

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Others in their network follow 
their example,

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and the schemes balloon in size

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before it comes clear that most members
aren’t actually profiting.

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Often, the victims are 
embarrassed into silence.

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Pyramid schemes entice people with the
promise of opportunity and empowerment.

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So when members don’t end up making money,

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they can blame themselves 
rather than the scheme,

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thinking they weren’t tenacious enough 
to earn the returns promised.

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Some victims keep trying,

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investing in multiple schemes,

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and losing money each time.