What's Wrong with Chain Letter Pyramid Schemes?

If you've spent any time reading Usenet news, you've seen postings with subject lines like "Make Cash Fast." It sounds harmless; you send $1 to five people on a list, then new members send you money, and so on. What could be wrong with that?

This page:
Most People Lose | You Will Get Flamed | You Will Probably Lose Internet Access | You Could Be Prosecuted | You Could Even Reduce Your Nation to Chaos | Other Links | Legal Note

Most People Lose

Most people who participate in these pyramid schemes lose, because sooner or later, no new participants can be recruited to keep the scheme going. Posters who start these threads claim it will work if everyone is "honest." In fact, with the usual send-this-message-to-five-people scheme, it only takes 15 steps in the scheme before the total number of participants must be 7.6 billion — larger than the Earth's population — in order for the scheme to continue.

Number of People Necessary to Keep a Pyramid Scheme Alive
Step New Recruits Total Participants
1 1 1
2 5 6
3 25 31
4 125 156
5 625 781
6 3,125 3,906
7 15,625 19,531
8 78,125 97,656
9 390,625 488,281
10 1,953,125 2,441,406
11 9,765,625 12,207,031
12 48,828,125 61,035,156
13 244,140,625 305,175,781
14 1,220,703,125 1,525,878,906
15 6,103,515,625 7,629,394,531

Chances are, you will lose. Even if you come out ahead, it is at the expense of someone else. These schemes always cheat most of the participants. What's so honest about that?

Update, Dec. 2004: I got an e-mail recently urging me to point out the "positive aspects of a legal ponzi dream." There's just three problems with that:

Both Ponzi schemes and pyramids are quite seductive because they may be able to deliver a high rate of return to a few early investors for a short period of time. Yet, both pyramid and Ponzi schemes are illegal because they inevitably must fall apart. No program can recruit new members forever. Every pyramid or Ponzi scheme collapses because it cannot expand beyond the size of the earth's population.
-- U.S. Federal Trade Commission (www.ftc.gov/speeches/other/dvimf16.htm).

You Will Get Flamed

When you e-mail these schemes to hundreds or thousands of people, you are not giving them the opportunity of a lifetime. Experienced Internet users will not be fooled. You are just another spammer stuffing their inboxes and wasting their time. Most of them will probably just delete your message, but some of them will tell you off or report you (see below).

When you post these schemes to newsgroups, you are interrupting the usual discussions about literature, science, art, sex, entertainment, etc. Regular Usenet readers have seen these schemes before and they don't like it when you interrupt their discussions. They will answer you in kind. Some may politely inform you why these posts are not appreciated; some will not be so polite.

You Will Probably Lose Internet Access

All responsible Internet sites have policies against posting pyramid schemes. You were probably notified of this when you were given an account. Some of the people you offended when you posted your pyramid scheme will send copies to postmaster@yoursite.com or postmaster@yourschool.edu (for complaints about a post coming from an America Online user, e-mail abuse@aol.com).

(See other links, below, for more ideas about how and where to complain.)

Your system administrator may let you off with a warning, but you could have your Internet access suspended or revoked. If you are posting from school or work, you could be disciplined for using your institution's computers to post pyramid schemes.

You Could Be Prosecuted

Sometimes posters claim that these schemes are completely legal, claiming they are mailing list or recipe services. These posters may even cite title 18, sections 1302, 1341, 1342, and 1343 of the "Postal Lottery Laws." These sections are part of the U.S. Code. I'm sure that none of these people have actually read them, because they do not authorize pyramid schemes. In fact, these are the very laws that make pyramid schemes illegal. (Take a minute to read 18 USC 1302, 1341, 1342, and 1343 for yourself.)

They may also claim that their e-mails are legal under "S. 1618" or "H.R. 3113." These were bills in the U.S. Congress that failed to become law. They have no legal effect.

Pyramid schemes have long been illegal when conducted by mail in the United States or Canada. The same laws apply to Internet chain letters if the mails are used at any point in the scheme.

The latest twist in these schemes is to claim to be selling something, such as reports, mailing lists, or recipes. The U.S. Postal Service warns:

Do not be fooled if the chain letter is used to sell inexpensive reports on credit, mail order sales, mailing lists, or other topics. The primary purpose is to take your money, not to sell information. "Selling" a product does not ensure legality.

[A couple of ideas for Americans wishing to report pyramid schemes: If the e-mail asks you to send money through the mail, you may report it using the U.S. Postal Inspection Service Mail Fraud Complaint Form, e-mail fraud@uspis.gov, or report it via snail mail to

Postal Inspector
c/o Postmaster
Your City, Your State, Your Zip

(A stamp is required.)]

For links to government agencies in the U.S. and other nations, see other links, below.

You Could Even Reduce Your Nation to Chaos

In 1997, Albania was plunged into chaos and civil war, because as many as half its people lost their life savings in pyramid schemes. In 2010, citizens of the West African nation of Benin were duped by their president into investing in a pyramid scheme.

Other Links

I   sometimes get requests asking me to comment on the legality or repute of a suspicious-looking scheme. I am not a lawyer, so I cannot make legal conclusions about specific matters. All I can tell you is to avoid anything that looks anything like a pyramid scheme or that seems too good to be true. If you start or participate in one of these schemes, you risk jail time or large fines. It's not worth the risk.

 
Copyright ©  by Robert Teeter (Copyright and disclaimer page)

Updated: December 25, 2013