7 Notorious Pyramid Schemes and Fraudulent Scams

Over the years, several infamous companies have faced accusations, and in some cases, legal convictions, for participating in fraudulent activities. You might know these schemes as “Ponzi schemes” or “pyramid schemes.” Although these terms are often used interchangeably, they represent distinct forms of investment fraud. Both depend on incoming funds to sustain unrealistic promises, but their operational structures differ significantly.

What exactly is a Ponzi scheme?

In a Ponzi scheme, participants are lured into making investments with the promise of passive, high returns. For those at the top, the scheme works—funds from new recruits at the bottom are used to pay off earlier investors. However, those at the bottom bear the brunt of the losses; their investments are often used to create the illusion of returns for earlier participants, falsely presented as profits from wise investments. Although not the first to orchestrate such a scheme, the term “Ponzi scheme” originates from Charles Ponzi, who deceived investors out of $20 million through a stamp-selling scam before being exposed in 1920.

What exactly is a pyramid scheme?

Pyramid schemes often focus on retail, where the primary goal is recruiting individuals to sell products. However, the real profit comes from recruitment rather than product sales. New members are typically required to purchase inventory and may face substantial fees to participate. Those at the bottom of the pyramid sustain the system, often only earning significant income by recruiting others to replace them at the lower levels.

Where does multi-level marketing come into play?

Multi-level marketing, or MLMs, should not be overlooked. MLMs are legally recognized and can sometimes resemble pyramid schemes. However, the key distinction is that MLMs compensate sellers based on actual product sales. While recruiting new sellers can also generate income, it is not the sole or primary method of earning money.

Now that you understand the differences between pyramid schemes and Ponzi schemes, let’s explore some notorious alleged scams from history, as featured in an episode of The List Show on YouTube.

1. Holiday Magic

Holiday Magic began when William Penn Patrick acquired a small cosmetics company. He rebranded it as Holiday Magic and started recruiting individuals to sell products like lipstick, blush, powders, and creams, which were marketed as being made from organic materials.

For an additional cost, distributors could join his “Leadership Dynamics” program. This course involved extreme activities, such as being placed in coffins, strapped to a cross, and subjected to physical challenges. Patrick argued that these exercises were designed to help participants gain a deeper appreciation for life and demonstrate their mental resilience to advance further.

Patrick’s schemes brought him immense wealth, and he openly flaunted his success. One advertisement for the company showcased a yacht with the caption, “Doesn’t every cosmetics company have a Navy? Probably not. But then again, not every cosmetics company is Holiday Magic.”

In the early 1970s, legal troubles arose as the government accused Patrick of defrauding over $250 million from the 80,000 individuals he had recruited. However, before facing trial, Patrick died in a plane crash. Despite being convicted of deceptive trade practices, the company continued operating for several more years before eventually fading away.

2. Koscot Interplanetary

As a high-ranking member of Holiday Magic, Glenn Turner reportedly made over $30,000 monthly. Recognizing a lucrative opportunity, he launched Koscot, which stood for “Kosmetics for the Communities of Tomorrow.” The addition of “Interplanetary” gave the door-to-door cosmetics business an audacious and futuristic flair.

Similar to Holiday Magic, Koscot operated as a classic pyramid scheme. New distributors paid a sign-up fee of $5000, granting them the ability to recruit others at a $2000 entry fee—$700 of which they kept as commission. Legal challenges arose when the Pennsylvania attorney general highlighted that each distributor was expected to recruit 12 more individuals, who in turn would recruit 12 more. This exponential growth would theoretically require over 8.9 trillion participants after 12 tiers—far exceeding the global population at the time.

This model was clearly unsustainable. Perhaps this is why Turner also introduced Dare to Be Great, a motivational program inspired by Holiday Magic’s tactics. Participants purchased “adventures,” or sales training courses, priced between $100 and $5000. Turner’s unconventional methods included shouting “Money! Money!” at attendees to motivate them.

The FTC and SEC targeted Turner for his involvement with Koscot and Dare to Be Great, forcing both ventures to shut down. Undeterred, Turner launched Challenge, Inc., another motivational program promising substantial earnings for a $5000 investment in course sales. This venture eventually led to his imprisonment. After serving five years, he resumed his career as a motivational speaker.

3. LuLaRoe

LuLaRoe, a multi-level marketing company known for its leggings and apparel, gained infamy for its cult-like following and for leaving numerous distributors with excess inventory, driving some to bankruptcy. In 2019, Washington’s attorney general, Bob Ferguson, alleged that the company operated an illegal pyramid scheme, stating, “LuLaRoe lured consumers with false promises of high earnings and refunds for unsold products.” By 2021, LuLaRoe settled for $4.75 million in Washington state to avoid a trial and was required to revise its sales practices. That same year, Amazon released LuLaRich, a four-part documentary series exploring the company’s controversial operations.

Although LuLaRoe continues to operate and denies being a pyramid scheme, its distributor count has plummeted from 80,000 to under 20,000, and the company remains entangled in ongoing legal disputes.

4. BurnLounge

The early to mid-2000s marked the rise of the digital music industry. In 2005, BurnLounge emerged, recruiting individuals to launch digital music stores with pre-designed webpages. The success of these stores largely depended on the package purchased. The basic package cost $29.95 annually, while VIP access required $429.95 per year. Store owners earned points, not cash, from music sales—unless they paid an extra $6.95 monthly to join the Mogul program.

Store owners made a mere 50 cents per album sold but could earn up to $50 for recruiting new sellers and selling packages. BurnLounge’s leadership, including CEO Juan Arnold, claimed recruits could make hundreds of thousands of dollars, even calling the business model a “license to print money.”

In reality, most store owners struggled to earn anything. Between 2005 and 2007, the company paid $17.4 million in commissions, with 66 percent going to the top 1 percent of sellers and 85 percent to the top 6 percent. This left only 15 percent for the vast majority of participants at the bottom.

The FTC labeled BurnLounge a pyramid scheme and filed a complaint in 2007. By 2008, the company was effectively defunct. In 2015, the FTC announced that tens of thousands of Mogul participants would receive a portion of $1.9 million from BurnLounge’s settlement.

5. TelexFree

Beginning in 2012, TelexFree deceived an astonishing 1.8 million people, amassing a total of $3 billion. The scheme revolved around offering free internet phone calls to Brazil and other Latin American countries. Participants didn’t need to sell the product; instead, they had to pay to join and purchase online ad space. They were also encouraged to recruit others. Investigations later revealed that only 2 percent of TelexFree’s revenue came from its VOIP service, while 98 percent was generated from new member investments.

When U.S. and Brazilian authorities launched investigations, TelexFree suddenly closed, filed for bankruptcy, and froze all member accounts, leaving participants with nothing. While there’s no happy ending, some justice was served: In 2017, the company’s president was sentenced to six years in prison for fraud. Additionally, in 2020, a court ordered the distribution of over $150 million to 100,000 victims.

6. Fortune Hi-Tech Marketing

The Kentucky Attorney General once described Fortune Hi-Tech Marketing as “one of the most widespread pyramid schemes in North America.” Launched in 2001, the company boasted over 160,000 representatives selling a vast array of products, including DISH Network subscriptions and vitamins. Representatives paid around $1500 annually in fees and product purchases, yet 90 percent earned less than $15 a year. In contrast, the top-tier “Presidential Ambassadors” made over $1.2 million annually. The FTC shut down the company in 2013, though executives denied any wrongdoing.

As of July 2022, the FTC continued distributing checks from the Fortune settlement, returning a total of $4.6 million to victims. This amounts to $41.23 per person, far from compensating for their losses.

7. Vemma

College students, often in need of extra income, were the primary target of energy drink company Vemma. Established in 2004, Vemma promoted beverages like Bod-E and Verve, claiming they enhanced energy and aided weight loss. The company branded itself as “the Young People Revolution” and enrolled recent high school graduates. To sell these drinks, Vemma required affiliates to purchase starter packs priced as high as $600. Despite generating over $200 million annually in 2013 and 2014, 40 percent of its sellers earned less than $1000 per year.

In 2015, the FTC investigated Vemma, though the company denied any misconduct. By 2016, the FTC halted the recruitment aspect of their operations, and in 2019, over $2.2 million was refunded to 28,224 former affiliates—averaging about $79 per person. According to a Vemma press release, the settlement allowed the company to continue operating and stated it “included no admission of fault or any finding that Vemma operated unlawfully or as a ‘pyramid scheme.’”