We’ve all heard of a “pyramid scheme,” but many people don’t actually know what they are. Pyramid schemes usually appear in the form of multi-level marketing companies, also known as an “MLMs.” They claim that if you pay an upfront cost for the privilege to sell for their company, you can become a so-called “business owner” and sell your way to financial success.
Once you’ve paid the fees to get on board and for the inventory, you have to push those products off on your family and friends by giving demonstrations either in person or online. Sales people actually earn more money from recruiting other people to sell, rather than the sale of the actual products. This creates a system where the sales people at the top of a company make the most from recruiting others, while people at the bottom are losing money — hence why it’s called a “pyramid scheme.”
People across the world lose millions of dollars every year to these scams, and there are still pyramid schemes out there. In fact, someone you love may already be working for one. However, calling an MLM a “pyramid scheme” is a very serious legal accusation. So today, we are only going to focus on the companies that have already been shut down. Without naming names, you just might be able to read between the lines, and see parallels to the ones that are still out there.
A man named Michael Ellis founded a dietary supplement company in the 1990s called Metabolife. Commercials aired on TV to advertise Metabolife, and to most people, it just seemed like one of the countless products out there that claim to help people lose weight. The one big difference was that Michael Ellis was a former police officer who was sent to jail for manufacturing and selling meth.
One of the main ingredients he used in the Metabolife pills was called ephedra, which is highly addictive. It’s true that the pills took away your appetite, but with the cost of a drug habit. The people on the sales force lost weight, and their friends noticed their positive results, which convinced them to join the Metabolife system. Once they were addicted, these people wanted to become sales consultants, too. The company became so successful that they were bringing in hundreds of millions of dollars on an annual basis.
One of the most frightening parts of this story is that Metabolife was actually FDA approved. The company finally came crashing down once the pills were linked to several serious illnesses, and over 100 deaths. Despite all of this damning evidence, the thing that actually brought them down was when the IRS came after them for tax evasion. The company went bankrupt, and was forced to shut down in 2005.
In 2005, BurnLounge offered people the opportunity to run their own digital music stores. In the commercials, they promised access to the music industry in exchange for a monthly fee. The company offered various packages from $30 to $450 per month in exchange for a storefront where so-called business owners could create custom playlists and sell mp3s from popular bands. They also claimed that independent artists did not have any platform to share their music with the world, and that BurnLounge would be the answer to finding success.
Instead of earning real money for selling music, they would get points, which could be redeemed for BurnLounge merchandise or song downloads. In today’s world, this company is obviously a scam, and we know that musicians can find exposure for free on websites like YouTube, but it actually went on for 9 years. The FTC declared that it was a pyramid scheme in 2014, and the company was forced to return over $1.9 million to its customers.
8. Holiday Magic
Established in 1964, Holiday Magic was a company that sold women’s cosmetic products like lipstick, perfume and lotion. You could pay $50 to become a “Holiday Girl,” or spend thousands of dollars to be a “General.” Obviously, the idea was that the more money you spent buying inventory, the more serious you were about succeeding. Ads for the company claimed that they could send a beautician to your home for a free consultation, which was really a way to convince strangers to have a demonstration and sell to their friends.
This company lasted for 10 years, and by 1974, they created a trust fund protecting $2,600,000 in funds that they took from their sales force. The company was found guilty of fraud, and forced to pay fines for each individual that they scammed into joining the company. With its reputation destroyed, it was forced to shut down.
WakeUpNow was established by a man named Troy Muhlestein in 2009. The company culture encouraged people to live the “WUN” Lifestyle. However, it was hard to pinpoint what the company actually did. Reporters from This American Life went to one of their conferences, and every single person gave a different answer as to what the company sold, but all of them recited the same mantra: “save money, manage money, make more money.”
Members were encouraged to sign up for a plan that cost $80 per month in order to get various products and software, and encouraged others to the the same. These products included energy drinks, coupons, tax software, identity theft protection, and a bunch of random things supposedly aimed at helping you succeed in life. They claimed that their top salesperson, Seemore Green, was making over $100,000 a month. And we’re sure he totally wasn’t lying about his name, or his income.
Team members were encouraged to advertise on Instagram, YouTube, and other forms of social media. In all of these videos, men were showing off a wealthy lifestyle that they attributed to their success from WakeUpNow. In 2013, the company was forced to be more honest about how much money their salespeople were actually making, and 95% of them were not earning any profit at all. In 2015, the company shut down.
6. United Sciences of America
Founded in the 1986, the United Sciences of America sold nutritional supplements as well as protein shake powders. The CEO was so confident that he claimed that by 1989, they would be the fastest growing company in America. There was no data to back up that claim, of course, but a delusional sense of self-confidence seems to be what a lot of people look for in a leader. The company had a long list of prestigious scientists who endorsed their products. However, customers had no idea that those scientists were making between $10,000 to $20,000 per year in exchange for being quoted in commercials. They also received support from celebrities like Star Trek star William Shatner, who provided the voiceover for their promotional video.
After a few years, 140,000 people were working as distributors for the United Sciences of America. Reporters at NBC dug up more information about the company, and exposed the fact that it was all just a pyramid scheme. The company went bankrupt in 1997.
5. Equinox International
Founded by a man named Bill Gouldd, Equinox International was a multi-level marketing company that sold water filters and vitamins. It was getting an impressive amount of positive press in mainstream media, and it became the #1 Fastest Growing Company on Inc Magazine’s top 500 business list. The publicity they received in the magazine only helped to ease anyone’s concern that it may be a scam, so more people to paid to join and start trying to sell water filtration systems to their family and friends.
Over 100,000 people dropped $2,500 to attend the Equinox leadership conferences to learn how to become one of their sales people. In just a short period of time, Gouldd reported that the company made $195 million a year. The Federal Trade Commission spent 10 months investigating before they were able to gather enough evidence to prove that Equinox was a pyramid scheme. Embarrassed by their part in advertising for this company, Inc. reported a story exposing the truth behind the fraud, but of course, by then, it was far too late.
4. Koscot Interplanetary Inc.
As we mentioned earlier, a company needs to go to court before it can officially be declared a “pyramid scheme.” The first company was called Koscot Interplanetary Inc. In the late 1960s, they encouraged women to sign up to be “Beauty Advisors.” It cost $2,000 to earn the title of “supervisor,” and a they had to purchase a minimum of $5,400 in Koscot cosmetic products. They were encouraged to sell this makeup door-to-door, and at parties and demonstrations. The CEO of Koscot, Glenn Turner, soon had a net worth of $300 million, and his face appeared on the cover of LIFE magazine.
After being proven to be a pyramid scheme in court, the company was forced to shut down in the 1970s. Very soon after the Koscot case, the FTC also sued Amway for being a pyramid scheme. However, while the business model of Amway had similar qualities to a pyramid scheme, Amway’s defense lawyers argued that did not perfectly align with what is now known as the “Koscot definition.” So, Amway was free to function as a multi-level-marketing company, and they are still around today.
3. Fortune Hi-Tech Marketing
For $99 to $299, people could buy the privilege to sell on behalf of Fortune Hi-Tech Marketing, which sold TV service, cell phone plans, and, oddly… hair care products. Depending on how much you paid up-front, it gave you access to earning between .25 and 1% commission on sales, which made it the lowest-paying pyramid scheme on record.
But, of course, like other fraudulent companies out there, they claimed that you could become wealthy… if only you just tried harder. The reality was that 95% of sales people made an average of just $3,100 per year. The Federal Trade Commission declared that they were a pyramid scheme, and forced the company to give their sales people refunds for the signup fees. But, alas, they will never get their time back.
Yet another health food scam, MonaVie sold fruit juice, energy drinks, and powdered drink mixes. The company started a YouTube channel where they included videos of testimonies from people who reached the tops level of “Black Diamond.” These sales people all say that their lives were changed after selling MonaVie. In one video in particular, a salesman claims that he was struggling financially before he found MonaVie. He had absolutely no sales or marketing experience, but after selling MonaVie for just 15 hours a week after work, he was able to buy a Mercedes and a nice house. Watching the videos, it seems obvious that these claims were too good to be true, and that company was a scam. But, apparently, loads of people fell for it.
The company was sued multiple times, but we can’t possibly go over all of the incidents in this one list. In 2014, all three of the founders chose to retire and solds off their shares of the company. Just one year later, MonaVie defaulted on a loan of $182 million. The company was forced to shut down for good.
The story of the cell phone service provider Solavei was $49 a month to sign up, but you could earn money if you convinced your family and friends to join the network, as well. If you had a “trio” of three people signing up, you could deduct $20 per month from your phone bill. There was no limit to how many “trios” you could have, so the CEO claimed that brand ambassadors could earn six figures, if they tried hard enough. Some people saw this as a way for them to get free cell phone service, while others saw it as a potential business opportunity. The company raised $3.6 million in funding from some big name investors, and continued to grow for several years.
In reality, their cell phone service was built on top of a T-Mobile package that already existed. So customers were overpaying for their service, and Solavei made a profit from these people who were trying to become entrepreneurs. In 2015, the company declared bankruptcy, claiming that it was the fault of the competitive landscape. They encouraged their existing customers to switch over to T-Mobile, because, y’know… they were already using it.