In these harsh economic times, persons seeking a quick and high returnon their money can be easily swayed to invest. Many people worldwide have lostmoney in pyramid schemes because of the promise of huge payouts on the initialinvestments. In recent days, investors in the Virgin Islands have sufferedlosses in a pyramid scheme. Therefore, it is of utmost importance that personsremain cognizant of fraudulent schemes when investing.
What is a Pyramid Scheme
A pyramid scheme entices investors by offering a huge and quick returnon the initial investment with money earned from recruiting more persons toinvest. Each new investor is also promised the same high returns once he bringsmore persons on-board.
A Live Pyramid Scheme Example
John joins an investment plan where he invests $100 and once he canfind four persons to join, he will get $20 for each one that joins. So John canmake $80 if he recruits four friends while there is actually $400 being paid inby his four recruits. When each of the four persons, John's second level,invites four more persons, John gets $10 for each of the new investors, nowJohn's third level, and he reaps $160. At John's third level, $1,600 would have been paid in by these newinvestors.
At John's fourth level, there will be 64 people investing with $6,400paid in and John will make $320 if his cut is $5 per investor. At a sixthlevel, the investors increase to 1,024 and at John's seventh level, the numberssoar to 16,384. When the number of investors under John is totaled, it is21,844 persons and they would have invested $218,440 ($100 from each person)through John's pyramid if there were enough new recruits. This cycle continuesbecause every new investor to the scheme becomes a 'John' starting his ownpyramid inviting new recruits.
Why Pyramid Schemes Fail
In the example above, the chances of John being able to increase to theseventh level are slim and an
eighth level would require 87,376 new persons. Problems withrecruitment may begin at John's third level because difficulties may havealready begun with gathering the 256 investors and as the pyramid grows, itgets worse. According to the Security and Exchanges Commission,"at some point the schemes get too big, the promoter cannot raise enoughmoney from new investors to pay earlier investors, and many people lose theirmoney". After a lower level investor makes his payment and can not findnew recruits because of over-saturation, lack of interest or negative feedback,the scheme begins to collapse.
In the Prepared Statement of Debra A. Valentine, General Counsel for theU.S. Federal Trade Commission on "Pyramid Schemes", she consideredthis latest recruit's perspective as they would have started their pyramid of investorsbut with being unable to gather recruits, would be unable to recoup theirinvestment.
Virgin Islanders are Defrauded
Janice Dorette Rey, an Anguillan who resided in the British Virgin Islands(BVI) at some point and also the United States Virgin Islands (USVI), wasarrested in Dade County, Florida on charges of Obtaining Money by False Pretense, Drawing and DeliveringWorthless Checks, Securities Fraud, and Being an Unregistered Broker-Dealer.Rey, according to the USVI Department of Justice and the St. Thomas Sourceonline news, defrauded investors in the USVI and in the BVI of over three million dollars with her pyramid scheme "GlobalCohesive Economics (GCE)". She promised high returns on the investmentsand in the end was unable to maintain the promises and was eventually caught byauthorities.
Errol George of the BVI Financial Investigation Agency Speaks
Rey's scheme caused the Financial Investigation Agencyof the British Virgin Islands (FIA) to remind the territory of the danger of investingwithout researching first. FIA's Director, Errol George issued a press release aboutRey's fraud advising people to be more vigilant because such fraudulent schemesare marketed well and lack of understanding and ease of trust make for easytargets.
The Director, when interviewed, suggested that persons interested ininvesting should be extremely careful before entering any investment and theyshould research, investigate and ask questions if there are any doubts. Henoted that it is very prudent to seek advice from the general businesscommunity and the financial regulatory body in the country, such as theFinancial Services Commission (FSC) in the BVI. George also suggested thatpersons should go with their gut feelings especially if the aura is negative.Everyone wants to make large sums of money in the fastest and easiest way. Thismakes it easy for thieves to come up with ways to defraud investors who are notinvestment or business savvy.
Pyramid and Ponzi schemes sound good to the listener but really docause monetary losses and potential financial ruin depending on the level ofinvestment since there is no way for the scheme to maintain the promisedreturns. Investors are reminded that they need to think carefully and choosewisely about the type of investment they want to pursue to avoid such schemes.Research, consultation and investigation are key to avoiding financial ruinfrom pyramid schemes.
