FTC turns Web on scammers

Investigators at the Federal Trade Commission are fighting fire with fire by launching
an online campaign against pyramid scams.

"We identified 500 sites on the World Wide Web as potential illegal pyramid
scams," FTC lawyer Paul Luehr said. "And we don't think we found them all."

FTC officials said pyramid sites and other scams are becoming an increasing problem on
the Internet, where almost anyone can set up a Web page easily and inexpensively.

"In general the schemes are not any worse than what we have seen in the
past," Luehr said. "But the cost of using the Web is very cheap as opposed to
hundreds of letters that have to be mailed."

Luehr said the people who set up Web sites devoted to pyramid scams are playing on the
entrepreneurial spirit of the Internet. "The Internet is populated by intelligent
businesspeople who are interested in networking with others," he said. But even
intelligent people can fall victim to a clever marketing scam.

A pyramid is an illegal business that makes money by recruiting others to join the
business. Recruits typically do not sell a product and provide no service other than
recruiting new members. To make money, new recruits have to convince more people to join
the pyramid. Ultimately, it's impossible to gain enough additional new members to maintain
profits for the members who joined earlier.

Where pyramid creators in the past recruited investors by sending out hundreds of
letters and paying postage, today the method of choice is to set up a page on the Web and
find enlistees for practically nothing. But despite the method used to recruit the new
members, the scams are still illegal.

"Pyramids were big in the '70s," Luehr said, "but today many people
don't even know they are illegal. There are really two groups of people who need to know
that: the ones who are creating the pyramid sites on the Web and the people who are
thinking about joining the pyramid."

FTC has initiated a two-pronged electronic attack against pyramid scams. The first part
of the program involves continuous scanning of Web pages and Usenet news groups. "We
have people surfing all the time," Luehr said. When a page or message is found that
is thought to be promoting a pyramid scam, the page is printed, dated and certified in
case criminal charges are an issue. Most of the time, filing charges is not necessary.

"When people learn what they are doing is illegal, they usually take the site
down," Luehr said.

Last month, FTC sent warning letters via e-mail to the operators of more than 500 Web
sites they suspected to be pyramid scams. Their plan is to visit the sites again late this
month to see which ones are still operating.

"We have received several letters from people we sent the notice to," Luehr
said. "While some have, shall we say, strongly defended their freedom of speech, most
have apologized and said they had no idea what they were doing was illegal."

The second front in the war against pyramids involves the creation of fake Web pages
designed to lure potential investors. The FTC creates Web pages that look exactly like the
typical pages used in pyramid marketing. Data on the pyramid is given and as viewers click
through the site the selling becomes more intense until they reach the last page.

When users get to the end of a chain of pages there is a warning from the FTC that
participation in a pyramid scheme is illegal as well as a poor investment. "We have
to get people while they are interested," he said. "This is the third fake Web
page we have created." Two other Web sites, the Prosperity Page and a page devoted to
college scholarship fraud, both received a high number of hits before they were retired.

Now the FTC is turning its attention to the Usenet, looking for people who post
information about pyramid schemes on news groups. Besides general announcements posted
throughout the Usenet, the FTC is planning to track down and warn those who are making
pyramid postings.

Because people creating a pyramid have to place a trail back to their base of
operations if they want to collect any money, they are easy to track.

Send information or tips about illegal pyramid scams via e-mail to [email protected]  or call 1-800-876-7060.

About the Author

John Breeden II is a freelance technology writer for GCN.

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