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January 6, 2002

Gifting Clubs Held Illegal

During the past two years, hundreds of "gifting clubs" have been "cracked" as illegal pyramid schemes by authorities in nearly two dozen states, according to an Associated Press article that ran in the St. Louis Post-Dispatch in January. 

The article states that prosecutors in Fulton County estimate that some 8,000 of the county's almost 40,000 residents were involved in "gifting clubs" and that up to $16 million changed hands.

Fulton County residents Doug and Susan Manock ran a "gifting club" that was so popular it was necessary to hire a secretary to track all the money that changed hands.  But like others involved in similar dealings, they were surprised to learn that their operation was illegal.

The Manocks acquired at least $56,000 from their club, almost twice their yearly earnings from their camera shop.  Susan Manock recalls telling her husband, amid piles of money on their floor, "Honey, if this keeps up, we will never have to work another day in our lives."

Even though Doug Manock agreed to plead guilty to a misdemeanor for promoting an illegal pyramid scheme, he and his wife still believe they did nothing wrong.

The Associated Press article points out that such clubs are not deliberate fraud promoted as investment by phony financial advisers like most pyramid schemes.  They are usually homespun endeavors between friends and neighbors who believe they are helping each other.  But the catch, according to police and prosecutors, is that no merchandise changes hands, and someone always loses---a typical pyramid scheme.

The way it works: people join by generally pitching in between $2,000 and $5,000, and recruit others to sign up.  As names rise on a list (the "board"), the money grows.  Cash is passed from successive members to those higher on the board.  Those highest on the board generally leave with at least eight times the amount they invested.  Those on the bottom lose their money when participants decline and no more cash is pumped into the pyramid.

"Eventually it extinguishes itself because you run out of people," John Haverhals, a professor of mathematics at Bradley University in Peoria told the Associated Press.  "It can't continue forever, even if every person in America joined in."

Unlawful promotion of a pyramid scheme is a Class A misdemeanor, punishable by up to a year in jail and $2,500 fine.  There were 11 Fulton County residents who pleaded guilty, including Doug Manock.  According to the article, most agreed to pay back the money, undergo court supervision and make donations to a charity in exchange for no jail time.

Original Source: St. Louis Post-Dispatch, by The Associated Press, January 6, 2002