October 28, 2002                                                         Contact:Lucas Hamilton

Morrison reminds Montanans pyramid schemes are illegal

      As news spreads across the country of pyramid schemes preying on women from California to Maine, State Auditor John Morrison reminds Montanans that they are illegal.
       Morrison's office has issued cease and desist orders against several pyramid scheme participants in recent months and in May, fined Garrison resident Donna Gilman $5,000, and ordered her to pay restitution and administrative hearing costs for her participation in a pyramid scheme in early 2000.
       Of particular note in the national media in recent days are pyramid schemes targeting women, also called "gifting programs." They go by names such as "Women Helping Women," "Women Empowering Women," "Circle Sisters," "Dinner Party," "Gifting Program" or "Pit Stop," and have been identified in dozens of Montana communities.
      "A decade of economic despair has caused many Montanans to look for alternative ways to make money," Morrison said. "Pyramid schemes are not the right place to look. They are illegal, and unfortunately, more than 90 percent of all participants lose the money they put into the program."
      Pyramid schemes are fraudulent because nothing of value is purchased or sold when a person joins the program. Rather, the money is "recycled" to existing program participants. Continuation of the program is dependent upon new recruits. Eventually, the pool of people available for recruitment dries up and the pyramid collapses so the people on the lower pyramid tiers never get their money back, let alone make a profit.
      Women Helping Women, a pyramid that recently has circulated Montana, consists of four levels. There are eight spots on the fourth level, four on the third level, two on the second and one on the first. The individual or individuals on each spot of the fourth level were to provide $3,000 (for a total of $24,000) to the person or people on the first level. The first level disappears after the money is exchanged and the pyramid splits in two. The two spots on the second level become the top level of two separate pyramids. The goal at that point is to recruit participants to donate $3,000 for spots on the bottom level of each of the new pyramids.
      Pyramid schemes tend to appear in cycles and fizzle quickly because so few people make money, Morrison said.
      "They shut down when a large group of people loses its money, but return when people are looking for ways to make money they aren't earning from a lost job or a business that is not doing well," Morrison said. "Many people are struggling financially and are desperate to do anything to get ahead. We want to see Montanans succeed, but not through illegal activity."
      People found in violation of the law prohibiting pyramid promotional schemes could face penalties of up to $10,000 per violation and/or 10 years in prison.
      In June 2001, District Court Judge Thomas Honzel upheld the constitutionality of the statute defining a pyramid scheme, substantiating the authority of the State Auditor's Office to pursue gifting programs as pyramid schemes.
      "We do not plan to prosecute every single pyramid scheme participant," Morrison said. "Our goal is to stop individuals who promote and lead recruitment efforts."