Consumer Safety & Awareness Part 12

Pyramid Scams: Introduction

Greed can make many people act unscrupulously; especially if they themselves have been scammed into believing what they are saying is the truth. Most pyramid scams are based on this. Pyramids, similar to what is known as Ponzi schemes, are illegal in every state. They are based on making promises that cannot be easily disproved and that appear to work. Many e-mail scams today are based on it. In fact I remember seeing similar things run by classmates when I was in school, oh so many years ago. I doubt the kids knew what they were doing was illegal.

Consider the shape of the pyramid and relate it to this scam. The person at the top comes up with a moneymaking idea: an investment in something that does not exist. For example, they promise everyone that they will invest money in a great company that has been averaging 5% returns a month for the last six years. Only he knows about them and only he can get the money to the investment company. It is usually located outside the United States and does not come under US laws and regulations. If you invest $200, the least they will accept, which is really not much, for three years, you will get a check for at least $10 a month every month for those 36 months, or a total of $360. And you will then get the original investment back. Since the company is building a Costa Rican hotel or a German factory, or digging a Peruvian gold mine, you will never have to report it to our government, as the money was not made in this country.

So you invest the $200 and, sure enough, in a month you get $20 in cash, a whopping 10% return. Then the scammer gives you a new opportunity: he will share half of the fee the company pays him, for every new person you can get to invest. He gets $4 a month for each investor, so if you get 10 people to join you’ll get an additional $20 monthly. Thus the pyramid grows. During the next few months your return may vary between 5 and 10%, so after four months you have gotten at least $60 back, more than a quarter of your investment

If he has 100 people on the hook initially, and runs this scam for four months before disappearing, he’s made $140 from your initial investment (times 100 people) and, if each of those people get 10 more, than those ten get ten more investors, there is obviously a lot on money being forwarded. Some invest more than $200 or contribute additional sums after the amazing 10% return the first month. You can imagine that in four months the quite large pyramid has made him well over $100,000 or even $200,000. He then, suddenly, and with no way of contacting him, disappears. Since only the original 100 people ever met the scammer, or shared e-mails with him, and each of them has profited from those they brought in and are thus unlikely to go to the cops, the scammer rarely gets caught.

The greatest of such scammers, Alyn Richard Waage, used a pyramid scheme to take money from around 15,000 investors. His total was estimated at $60 million dollars. He set up a company called Tri-West Investment Club, and, using a web site and e-mail, told investors the money would be put in safe, high-yield securities. When he was eventually arrested, and jailed in South Carolina, it was discovered that the money had been spent on a private yacht, a helicopter and real estate.

A close friend of mine lives in a small town around an hour from Bogotá, Columbia. His area made huge news last November with the breakup of a country-wide pyramid scam that possibly included as many as a ten percent of the people in the country. David Murcia Guzman, who named his company after himself, DMG, escaped to Panama, but was captured and returned to Bogotá. The 28-year old, executed his scheme for around 3 years, hooking in over 200,000 Colombians who sold their homes to invest with him.

The Colombian newsweekly magazine, Semana, described it this way:

For the last two years, a unique economic situation has calmed the income anxiety of those who live in the Putumayo region, which since the 1990s has based its economy on coca cultivation and harvesting. Many people arrive at the DMG offices as much as two days before the payment day. Months ago they had left millions and millions of pesos in DMG’s coffers. Some lost all of their savings. Others, what they got from selling their house, their car or their farm. There are even some who have taken out bank loans in order to invest the cash in this magical way of increasing their capital. When they arrive at the branch, the person receives the “benefit” of his investment, as agreed in each contract. Interest rates of 10, 15, 30, 50 percent, and during “special offer” periods even 100 percent.

Ten million pesos in DMG’s hands for six months can be turned into 20 million. Or if you prefer a monthly payment, they will give you a million pesos every 30 days. That is, 10 percent. One can choose whichever way one prefers. Either way it is well above what any bank would pay to a savings account holder.

David Murcía Guzmán is the person behind this miraculous system. A young man of less than 30 years about whom little is known in the region. Only that one day he came to six of Putumayo’s 13 municipalities and set up his business. The DMG offices, the local population says, have strong safes to hold the cash that arrives at the regional airports and is transported along the department’s awful roads by armored, escorted cars.

There is nothing clear about this business. There are no sanctions from Colombia’s bank-oversight agency; there are no results from the preliminary investigations that the Prosecutor-General’s office began. The business is so prosperous, that in a zone where the narco-economy led the parade for years, it is easy to imagine that something strange is behind this surprising way of getting many out of poverty.

But this matters to very few. In the region, people are so content with DMG that any politician who wants to campaign and win elections in Putumayo would do well not to get involved. “A legislator asked in public about the origin of this money and called for an investigation, and the next day he had thousands of opponents in the department. The people will not allow this subsistence source to be taken from them,” commented a departmental government official.

At least two people were killed in riots in November when the people who ran the local DMG offices started shutting their doors and disappearing with cash. Mr. Guzman faces charges including money-laundering and illicit enrichment. He denies the allegations. Even after he fled, was arrested and returned to Colombia, his scheme continued, taking on a life of its own. DMG was still operating until the police closed its 60 branches across Colombia. Protests against the government by investors who insist that the company is legitimate and that the government had forced its collapse lasted for weeks. The Colombian authorities believe DMG was the most sophisticated pyramid scheme this country has ever seen.