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April 27, 1999


The Los Angeles Times reports that five people were arrested at the Hollywood Palladium on April 26 during a meeting of almost 1,000 potential participants in what authorities describe as a pyramid scheme. The five were booked on suspicion of operating an "endless chain", which is a felony according to LAPD Detective Greg Schwien of the Financial Crimes Division.

Those arrested are thought to be the organizers of "Families and Friends Social Club". The organization invites participants to make "donations" of $2,000 with the possibility of earning $12,300 in a matter of weeks if they recruit others to join.

According to authorities, the operational scheme of the club is typical of the classic pyramid, illegal because of its endless requirement for investors. The last "members" to invest are the least likely to recover any return on their investment.

The LA Times article describes previous similar pyramid schemes called "Friends Helping Friends" and "Friends Helping Friends and Family" operating in the San Fernando Valley that were both dismantled by police in 1996. But police believe this is the largest raid on a pyramid scheme in several years. More arrests were expected.

In her article, Times reporter Caitlin Liu writes that "Families and Friends" began in Southern California with a "handful" of people last December, growing to more than 1,000 by March. An anonymous organizer whom she interviewed, said membership is now in the thousands. "Members" appear to be mostly middle-aged and elderly African Americans and Asian Americans.

Apparently, organizers went to great lengths to make the club seem legitimate. They designed it around mini-societies, hierarchically structured like pyramids. "Members" making $2,000 "donations" received organizational charts of their mini-societies complete with names of everyone involved, certificates with identification numbers, and pamphlets assuring that membership was based on "honesty, integrity and trust." Club literature denies any solicitation of financial investments. Liu says several members she interviewed gained a "sense of comfort from the ‘paper trail’".

Shortly before the raid took place, the club began its meeting with a minister-led prayer, and a young man claiming to be a financial planner who explained that "member donations" were for charitable purposes, and that there should be no expectations of receiving anything in return. However, Liu writes that it was obvious that people leaving the auditorium during the raid had expected a profit from their investment.

Pyramid schemes and chain letters are illegal in the United States and many other countries. A key difference between a pyramid scheme or chain letter and a legitimate multi-level marketing opportunity is the value of some business purpose. Ask yourself, "What does the company sell?" An illegal pyramid scheme has no business purpose---rather its emphasis is on getting other people to enlist.

Original Source: Los Angeles Times, April 27, 1999.

For more information about the difference between legal and illegal companies in the United States, visit the library. Particularly appropriate is the article "Identifying Illegal Pyramid Schemes".