UA site of numerous illegal pyramid schemes

By Bryan Hance
Arizona Daily Wildcat
March 18, 1996

Illegal financial schemes that promise easy money are circulating on the University of Arizona campus.

With names such as "The Investor's Club," "The Money Pyramid" and "The Airplane Game," these schemes hide what is actually an illegal pyramid scheme, according to a pamphlet published by the U.S. Securities and Exchange Commission.

Pyramid schemes are based on the same premise as a chain letter. They are characterized by a promise of a quick, high-profit return on investments but need an unending flow of new participants in order to function, the pamphlet states.

The process is also called a Ponzi scheme, named after investor Charles Ponzi, who defrauded people in the 1920s with a pyramid investment scheme.

Although the process varies, a person enters a pyramid scheme by paying to add his name to the bottom of a list of participants. This enrollment fee is given to the person whose name is at the top of the list. After a certain number of new participants is met, the top name is deleted, two new lists are created with the second and third names, and the process continues. In theory, the person should make a profit as his name reaches the top of a list and new enrollees enter the scheme.

According to federal law, a pyramid scheme involving money sent by U.S. Mail is a federal violation punishable by a $1,000 fine and five years imprisonment. If the scheme affects a financial institution the penalty can reach $1,000,000 and 30 years imprisonment.

University police Sgt. Brian Seastone said he cannot recall any previous problems with pyramid schemes on the UA campus.

Although a pyramid scheme's first few participants may make a profit, the pyramid will eventually break down because the process involves a large number of people very quickly, said mathematics lecturer John Leonard. Eventually there are not enough incoming members to support the system and the process cannot continue, he said.

One scheme on the UA campus offers a $200 return for an initial $25 investment. A scheme that operated during the fall 1994 semester offered an $800 return for an initial $250 investment, said a management information systems junior who declined to give his name for fear of physical retaliation.

The junior entered a pyramid scheme last year and ended up losing money, he said. His friends, who started the scheme, made a profit.

"The guy who started it made tons of money," he said. "He did three pyramids at an $800 payoff each and made like $2,400, but that's because he was the first one to do it."

The pyramid failed when it became difficult to recruit new members, he said.

"When you explain the idea to someone, there's no flaws in it," he said. "But the thing grows so fast and people get involved so quickly and the more people know about it, the harder it gets to recruit people."

The $25 scam circulating on the UA would involve 78,125 people after splitting six times, more than twice the number of students registered for the fall 1995 semester. By the time he reached the position to collect his money, the junior said, the scheme was falling apart. He ended up losing $100 after he paid back as many enrollees as possible.

"Most people involved with this are not as nice as I am. They're ruthless. I was recruiting friends because I wanted them to make money, so I paid them back," he said.

Pyramid schemes circulate throughout campus but are most popular in fraternities, he said.

"People are so willing to trust their fraternity brothers and then the frats, because there's so many people in them. The pyramids can split four or five times a day," he said.

David Martinez, an officer with Theta Tau, said he had heard of on-campus pyramid schemes but did not know of any circulating within the organization.

Alpha Gamma Rho officer Edward Foster said he knew of pyramid schemes circulating last year but has not encountered any this year.

The anonymous junior said he "absolutely does not recommend" getting involved with a pyramid scheme.

"A lot of people are making money, but a lot of people are getting screwed in the end," he said. "Even if you do make your money, the people you know you made your money from are going to hate you because really, it's their money."