College students. They're young. They're impressionable. They're dirt poor. And they're perfect candidates for multi-level marketing (MLM) and pyramid schemes.
During my college days at St. Bonaventure University, I saw this with my own eyes and reported the sad story in the student newspaper. I saw how one man and his white board fooled six destitute young students into a system from which only he would profit. What started as making $7.50 triumphantly ballooned to hundreds of thousands of dollars. In his cookie cutter speech, the man never said the words "introductory fee" or "sales."
As one business professor I interviewed for the story said, "It looks like a duck. It walks like a duck. It is a duck."
That particular MLM was a notorious one called Quixtar, a/k/a Amway. It's just one of hundreds of companies profiting from the hunger on college campuses.
MLMs are technically legal while pyramid schemes are not. However, the fine line between the two is hardly visible. According to New York Attorney General Elliot Spitzer's website, what separates an MLM from a pyramid scheme is that a pyramid scheme requires investors at the bottom of the pyramid to invest in generally unwanted products and pay an initial introduction fee.
In a pyramid scheme, people are given direct commissions based on recruiting members. The people at the top of the pyramid structure make money from that original investment and not on the sale of products. MLMs use a pyramid structure but commissions are based more on sales than on recruiting.
The ConsumerAffairs.com database is filled with many sad stories of young students hoping to reverse their debt.
"I went to an interview (or so I thought) where I listened to a presentation in which a gentleman described how much money I could make and how controlling that corporate America really is," wrote Jennifer of Kansas City, Mo. "Needless to say I was young and insecure and fell easily into believing these people cared about me and my future."
"I was talked into buying $3000 worth of products within the first week, which was my entire savings. I was also talked into renting desk space, getting a phone line installed, going to training sessions all over the US every month, and to continue to buy products not only for myself, but to sell as well," Jennifer said.
"(They) made it appear that I could be rich within a year, they even tried telling me that I could move to San Diego to help start the 'new office' and that I would be the first in that market."
But it didn't turn out quite that way.
"After several months, all of my credit cards were maxed out, they had talked me into taking a leave of absence from my job, and I was barely paying the bills. I ended up spending over $14,000 on their promises of a better life. I had to file bankruptcy because I could no longer afford to live. Since then, not only did I lose money, I also lost credibility. I cannot get a decent car or home loan, I cannot get a credit card and I cannot move apartments for fear that when they check my credit report my application will be denied."
According to Spitzer's website, pyramid schemes are doomed to failure while MLMs may succeed -- for the people at the top of the pyramid that is. For more information read Spitzer's Don't get caught in a pyramid scheme. Also, attorney Joan Lisante reviews the pitfalls in her ConsumerAffairs.com story, Pyramids Belong in Egypt.