Local Pyramid Club Schemes and
Cash Gifting Club Scams
Beware the pyramid
By Julie Sturgeon • Bankrate.com 05/27/03
Lisa Bernfield is a rare woman not because she was
duped out of $4,000 but because she publicly admits it.
Six years ago, she accepted an invitation from a girlfriend
to attend a financial meeting. An independent publicist, Bernfield
was open to wealth-increasing strategies. She drove to the home of
an interior decorator whose floor space was packed with people interested
in learning more about The Platinum Gift Club.
"The host was gorgeous, throwing this party with
the help of his sweet, dear mom," Bernfield recalls. By the
end of that perfect fall night in Southern California, Bernfield
bought two opportunities for $2,000 each with the understanding that
her investment would eventually reap $32,000 as more people learned
about this great way to invest their cash.
"I knew I'd have troubles getting my circle of
friends involved. I relied on the friend who recruited me to pitch
in with invitations on my behalf," Bernfield says. It might
have worked given all the time in the world, but after the holidays,
the group meetings ceased.
She didn't get rich; she was out $4,000.
Bernfield is not alone. Across the country, people,
particularly women, are targets of this latest cottage-industry craze.
They are pitched as parties to help others earn money, but critics
and law enforcement officers warn that the gatherings are scams.
The names vary -- Friends Helping Friends, Women Helping
Women, The Friendship Investment Club, The Spirit of Giving -- but
the concept is the same. To become a member, the new member makes
a cash gift to the person at the top. Once this head honcho receives
a predetermined amount in gifts, he or she vacates the chair, the
group divides into two and everyone moves up to the next level.
James Walsh, author of You
Can't Cheat an Honest Man: How Ponzi Schemes and Pyramids Work
and Why They're More Popular Than Ever, calls these invitations
by their true name: pyramid schemes, a transfer of capital not
based on any profit-earning activity. For each investor to recoup
money, two more must join the club.
The imagery built around the operation varies. Some
use dinner-menu symbols where participants move from entrees to dessert.
Others construct a birthday party theme where the person on top unwraps
wonderful cash presents. The party version operates on amounts ranging
from $500 to $2,000. The occasional club requires a $5,000 buy-in.
That price, says Les Henderson, author of Crimes
of Persuasion, is the first sign you're dealing with professional
swindlers rather than naïve citizens.
The gifting investments typically offer a more informal
setting and seek to capitalize on a network-marketing emphasis. But
don't confuse gift clubs with multilevel marketing, Walsh warns.
"Even a poor MLM sells a product and you must
take a risk. There's no such thing as guaranteed profit. Risk-ratio
awards are one of the eternal truisms of a capitalist economy," he
says. The Federal Trade Commission rule of thumb: If a group bases
more than 30 percent of its compensation on recruiting new members,
No members, no money
Investors typically lose their money when the group
runs out of steam on the recruiting side.
In Bernfield's case, the organizer announced he intended
to devote time to establishing gift clubs in Oklahoma and had no
more time for his California ventures. The sheep in his pasture tried
to carry on, but the effort soon petered out.
Left out in the cold, most pyramid participants rationalize
or blame external forces: bad press, overzealous government attorneys,
sexist oppressors who don't want women to help each other make money.
"People just don't realize these are scams. They
think of them as bad consumer dealings, poor recruiters or unlucky
investors," Henderson says.
That's perfectly understandable, given the truckloads
of assurances the hosts spoon-feed at every meeting, Walsh says.
The clubs tend to spend a large part of the meetings defending their
tactics. Most attack the legalities head on, claiming they're not
pyramids because the host is eventually forced to retire rather that
keep raking in the dough as is typical of pyramid schemes. They also
devote reams of paper to approval statements from vague authorities
like "a police officer" or "a federal judge."
Bernfield says she knew at first glance the club was
illegal but still joined. "I'm a risk taker," she explains. "I
saw the money in action and understood the logic. As long as you
get people to buy, you move up the ladder."
Her candor is rare. Henderson has found that most participants
get sucked in because they can't say no to a friend. Walsh blames
the fun atmosphere cloaking the parties. "It's like a Tupperware
or Pampered Chef gathering," he notes.
And many experts hold the economy responsible for the
growing number of people willing to throw their money into the pot.
"Generally, these schemes signal a growing gulf
between the haves and have-nots," says Walsh. "One of the
dangers of the dot.com bubble was that it de-linked notions of real
value with compensation. When the unsophisticated investor lost in
the downfall, he decided the whole system was a crooked scheme anyhow,
so this little party isn't any worse than eToys."
Striking back with limited results
Bernfield took her beef against the gift club host
to small claims court, where the charismatic creator failed to show.
The judge was amused by her bald-faced assertion that she thought
the investment legal but ruled in her favor anyhow.
During the collection process, Bernfield learned her
host hadn't used his real name. She invested hundreds of hours into
tracking him down only to find him living in a nice home nowhere
Other disillusioned folks share her pain. Pyramid schemes
are difficult to litigate because most attorneys won't jump into
the fray for amounts less than $50,000, says Walsh. "Most gift
club perpetrators count on the nuisance value. They hope the legal
hoops are more than what most people will bear. They're right."
The clubs also avoid prosecution by employing cash-only
transactions to sidestep proof. Some insist members use only their
The tide, however, is turning. In 2003, club busts
and pending charges have been reported in California, Hawaii, Oregon,
North Carolina, Maine, Iowa, Pennsylvania, Texas, Oklahoma and New
Mexico. In addition to seeking the usual criminal penalties, some
prosecutors want club sponsors to make restitution to the victims.
But the chances are slim that the once-enthusiastic club members
will ever get their money back. As Bernfield learned, even when repayment
is ordered, collection isn't easy.
The best defense, Walsh maintains, is to avoid forking
over the dough in the first place, despite the friendships involved.
"Ask, 'What is the business?' What are we selling?
Recognize that 'networking opportunities' is not a commodity," he
reminds. "Don't accept the gibberish about the new economy and
the velocity of money. Keep asking, 'What's the underlying transaction?'"
And keep the questions handy. Henderson doesn't expect
gift clubs to disappear. "Nothing will ever stop it," he
says. "They will continue to work because human nature never
Bust Article By JENNIFER COLEMAN Associated Press Writer
10/23/02 SACRAMENTO -- They met in beauty salons and suburban homes
with the guests -- all invitation only -- coming for the promise of helping
their community while making a huge profit for themselves.
The "Women Helping Women" parties featured a lucky "birthday
girl," who would receive up to $40,000 in cash from the new participants,
who each donated up to $5,000 to get in and eventually celebrate her
But for many women, the birthday never came, say authorities, who call "Women
Helping Women" a $12 million pyramid scheme for which they have
arrested four Sacramento-area women. Their investigation also revealed
a candidate for district attorney in a neighboring county told partygoers
the events were legal and then asked them for campaign contributions.
The parties, authorities and experts said, were part of a pattern of
pyramid schemes found in nearly every state. Beyond women, these schemes
focus on other groups, such as Hispanics, blacks or members of the same
church, said Robert L. FitzPatrick, author of "False Profits," a
book on pyramid schemes.
A scheme "travels very much like a virus. It could move in any
direction. There's no mastermind behind it," FitzPatrick said.
Recently, officials in New Mexico indicted 20 people for allegedly running
similar schemes, said Sam Thompson, spokeswoman for the New Mexico attorney
"It's a cottage industry here," Thompson said. "People
get a hold of the paperwork, sometimes it's 'The Spirit of Giving' or
'Women Helping Women' or 'The Dinner Party,' and they just copy part
of it and start their own pyramid."
In Maine, the state attorney general's office last year warned of a
similar scheme that targeted men, sometimes using the names "NASCAR" or "Men's
In Sacramento, the four women face charges that could result in five
years in prison, fines and restitution. They are Cheryl Bean, 54, former
human resources officer at Pacific Bell; Anne Marie King, 47, co-owner
of a Roseville Montessori school; Pamela Garibaldi, 57, a part-time English
professor at a community college; and Cathy Lovely, 49, a homemaker.
Sheriff's detectives Mike Wright and Eric White said the enterprise
bragged of distributing $12 million and having 10,000 women participate
in the last two years and have documented more than $7 million that has
been collected, distributed or pledged in the Sacramento region.
Despite the charges against them, Bean, King, Garibaldi and Lovely have
plenty of supporters. A cheering crowd of women greeted them in the courtroom
for a recent hearing.
"They're genuinely good people," said Wayne Ordos, Lovely
and King's attorney. "They're taxpayers, they're den mothers. This
is very difficult for them."
None has entered a plea yet, but the four will return to court Wednesday.
Sacramento authorities placed undercover officers in five meetings,
starting in July, after similar parties had already been detected in
neighboring El Dorado County. There, District Attorney Gary Lacy warned
his employees against participating in them as early as April 2001.
But one El Dorado County party had another attendee -- Deputy District
Attorney Eric Schlueter, Lacy's opponent in next month's election. Schlueter
reportedly told party participants there were legal loopholes that allowed
such schemes, and then he solicited campaign contributions.
Schlueter told The Sacramento Bee newspaper that he didn't advocate "gifting," but
didn't believe it was prosecutable under California law. "It may
be a pyramid scheme," he told The Bee. "But whether it's illegal
is another matter."
FitzPatrick said he's never found a legal opinion calling the parties
anything other than an "endless chain" operation. "The
first lie is that it's legal," FitzPatrick said. "They'll tell
you it's not a pyramid, it can work and everyone can win."
But no pyramid can survive its unsustainable mathematics, FitzPatrick
said. Each woman must recruit eight others to get her $40,000. Then each
of those eight women must get another eight. Eventually, that pace can't
be sustained, and the pyramid collapses, leaving about 90 percent of
the participants out their investment.
"Women Helping Women" and other groups appeal to patriotism,
religious faith or the desire to help others, FitzPatrick said, and use "the
idea that women are helping women, supporting each other."
Women Helping Women organizers told their recruits they gave 1 percent
of their birthday awards to charities, but investigators said they haven't
seen evidence of such charitable activity in the Sacramento area.
Although pyramid deals gone bad often get attention, the early victims
rarely come forward, FitzPatrick said, making it difficult to steer potential
"A lot of people feel embarrassed and worry about their jobs," one
victim said, adding that some victims "are afraid that they'll be
arrested if they go to the police."
White said he's faced that problem in Sacramento, too, but "our
goal is not to arrest everybody. We've made a few arrests, and we're
going to make a few more, but not a whole lot more, and then we want
to move on."
Sacramento County Sheriff detectives would like to hear from people
with information about the "Women Helping Women" parties. The
telephone numbers are (916) 874-5848 and (916) 874-5845.
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