Scams and Pyramid Schemes


By Jeff Babener, Copyright 2001


In June 2001, the FTC took action against one of the original high flyers in the MLM web hosting business, Skybiz. The FTC charged Skybiz and its owners with what is described by Howard Beals, Director of the FTC Protection Bureau, as "This is one of the biggest pyramid schemes that we have seen."


 The FTC's position is that individuals bought the website hosting packages, not because they needed them, but in fact because they were "buying into the deal" and into a pyramid headhunting scheme.

The FTC charged that since 1995 Skybiz has bilked consumers around the world out of $175 million in a global pyramid scheme in which consumers were urged to buy website hosting packages and to encourage others to do the same. The thrust of the government’s allegations was that individuals bought the website hosting packages, not because they needed them, but in fact because they were "buying into the deal" and into a pyramid headhunting scheme. In addition, the FTC charged that Skybiz made deceptive earnings claims and that only a tiny percentage of participants earned any income.

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 Temporary Restraining Order
 Preliminary Injunction


In response to the filing by the federal government, a U.S. District court in Tulsa Oklahoma entered an injunction against Skybiz from continuing business and froze the assets of Skybiz and its related companies and owners. The company denied the allegations of the federal government and hearings were set. The FTC position – illegitimate scam; Skybiz position – legitimate web hosting. Only time will reveal the merits of the respective claims and defenses, but history has not been kind to defendants in such FTC actions. Perhaps the bigger question will be of the location and repatriation of moneys from a company operating on a global basis.


The FTC action was no surprise to industry observers that have watched Skybiz in operation since 1998. Many industry observers watched distributors of other direct selling companies migrate to the Skybiz opportunity. Although its early operations started in the United States, it took on a global approach very fast. The FTC indicates that the government started to investigate the company after receiving complaints from American consumers and from people in Australia, Thailand, India and South Africa. The FTC indicates that Canadian authorities have brought criminal charges against company associates in Canada, and Australia has a civil case pending against one of the associates. In addition, the government in India raided local Skybiz offices and froze local assets and directed that banks not allow remittance of money to the U.S. company Skybiz India Limited or any other overseas firm running schemes for sale of e-commerce web packages.


In an earlier article by this author, "Dot Com or Dot Scam?" the demise of the illegitimate web template business was predicted:


Many industry observers ask the question, "What will happen to all of these _on fire_ web template companies?" Given the historical experience of this type of business model, the following prediction may not be far off:


Out of ten of these sorts of schemes:

1. One will probably be targeted in a major way by a regulatory agency, such as the FTC, and prosecuted and put out of business.


2. One of the schemes will probably survive and ultimately transform into a legitimate business, but this will occur long after many individuals have been "burned" and lost their "investment."


 3. Eight out of ten of such businesses will probably go out of business of their own accord when the market has become saturated with the scheme they have been perpetrating. Some individuals who "got into the deal" early will have made a lot of money, and many will have nothing to show for it.


Everyone has jumped on the dot com train and there is no reason that the MLM industry should be any different. First of all, e-commerce and the Internet are dramatically changing the way network marketing companies do business - communications, documentation, sales catalogs, etc. Second, the Internet has ushered in a new regime of products and services, including Internet access, web site hosting and replicating web sites attached to e-commerce virtual shopping malls.


It is the replicating template web site attached to an e-commerce virtual mall that has created the most excitement and the most skepticisms in the network marketing industry. In particular, it is the business model in which distributors are encouraged to purchase multiple replicating web sites, and then are encouraged to cause others to buy multiple replicating web sites, all of which are used primarily for recruiting rather than e-commerce, that is causing the greatest concern. Regulatory agencies in both the United States and abroad have taken aim at companies which sell multiple web sites, accusing them of being front-loading, headhunting recruiting schemes. In fact, the point is well taken. Such business models are often not about e-commerce, but use the "facade" of e-commerce to run a cash pyramid scheme in which the "real money" is made by recruiting individuals to "front-load" other individuals with multiple web sites that are not so much for the marketing of products or services, but are used for recruiting others to do the same or are just plan "unused."


Periodically, the network marketing industry is faced with a phenomenon in which distributors leave legitimate product or service companies in droves to partake in a feeding frenzy in a "facade" MLM opportunity. The industry has seen this in overpriced phone cards, diet cookies, garage loads of water filters, high priced training fee telecom programs, gold bullion contract programs, travel and discount buying service packages, and a host of others. Such programs are short lived, but the industry suffers as individuals jump on the latest MLM junkie "pyramid train."


The multiple front-load recruiting web site phenomenon is no exception. In fact, it is a phenomenon that knows no borders. Perhaps the best analogy is the granddaddy of pyramid schemes, Dare to be Great, in which individuals paid thousands of dollars to attend motivational seminars in which they were taught how to recruit others to come to similar motivational seminars.


The Internet scams should not be confused with legitimate products and services relating to the Internet. For instance, marketing Internet access at competitive prices with AOL or MSN is perfectly legitimate. The marketing of web site hosting services to small businesses or individuals who buy those web site hosting services because they intend to use them and do use them for purposes other than "buying into the deal" or recruiting others to do the same, is legitimate.


Most major MLM companies have offered their distributors replicating web sites that tie into the home page of the MLM company to sell its products or services. This is a very useful tool, which is provided to MLM distributors to expand their business. It is entirely legitimate. It is questionable whether such web sites should be commissionable, in that they are being used as a sales tool, rather than sold as an independent web site hosting product. That issue must be left for another day, however, and companies have adopted different policies on this point.


It is the "scam" type template programs that individuals should steer clear. These are programs in which web template fees are paid to participate "in the deal" and not to move products or services. Individuals who are earning thousands of dollars a month in such programs are earning money not from e-commerce, but from front-loading their downline with multiple template sales.


Here are some of the warning signs that individuals should pay attention to before participating in a web hosting template multilevel program:

1. If individuals are encouraged to buy multiple web template sites, it is likely a sign of front-loading.


2. If the primary use of the web sites that are sold is to recruit others to purchase similar sites, red flags arise.


3. If, in discussing the program with others, it appear that little or no e-commerce is accomplished in a web template program associated with a virtual shopping mall, the MLM program is merely a "front" for moving money.


4. If there is really very little or no money to be made in e-commerce, this should cause concern.


5. If it turns out that many of the web template sites that have been sold by the company have not been initiated, this is a problem.


6. If the company sells multiple web sites and commissions are paid on web site sales before web sites are initiated, the program bears similarity to the illegal program of Gold Unlimited in which commissions were paid on gold contracts before gold was shipped.


7. If the company holds itself out to be a web site hosting company, but it cannot demonstrate sale or usage of web sites outside of the network of recruiters, this is indicative that the only reason people are buying the web template sites is to "buy into the deal."


8. If the company has located itself offshore, it is probably anticipating challenges to jurisdiction of U.S. authorities or shielding of assets outside the United States - a major red flag.


There definitely will be MLM web hosting survivors. There are many legitimate models out there whose true purpose is to market web hosting services as opposed to a headhunting recruiting scheme. In addition, many companies that have had regulatory problems will modify their approach. For instance, in March 2001, Big Smart entered into a consent decree with the FTC to modify its MLM web mall program to mandate monthly sales and profits to retail customers. There appears to be nothing wrong itself with web hosting services and over time, the Skybiz web hosting service did in fact appear to take on a quality approach. The government’s criticism of Skybiz relates more to earnings misrepresentations and the accusation that individuals purchased sites not because they wanted them, but because they were "buying into the deal." Whether or not Skybiz can reach an accord with the FTC similar to Big Smart to assure against earnings misrepresentations and to assure retailing to nonparticipants will be a matter between the FTC and Skybiz, as well as for the court’s consideration.


The fact is that no MLM company has stood the test of time that did not offer a quality service or product to its distributors and the general public. Over time, companies which have used fads or fashionable products or services as a "facade" to move huge sums of cash, have littered the highways of the network marketing industry. If individuals would like to think of the MLM industry as a lottery or a game of chance or a "deal," then the front-loading MLM replicating web site template programs are the latest of the "money games" for them. When the "money games" have passed, however, the rest of the legitimate network marketing industry will likely say "good riddance" and hope to attract distributors back to programs with "real" products and services with a real long term future.

Is there any future for Skybiz? Who is right in this dispute? The answer appears to be in the hands of the court. A review of FTC cases of this sort suggests a pattern of cases with consent decrees that lead to closure of the business.

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