Learning from the states: Feds should adopt anti-pyramid scheme law

To protect the rights and property of the citizens of our state, during my administration the Utah Attorney General’s office has focused considerable attention on fighting white-collar crime. We’ve targeted all manner of securities fraud and other illegal business practices, especially scams that exploit the trust of close-knit communities, known as “affinity fraud.” We have successfully prosecuted some of the biggest Ponzi schemes in the state’s history and are the first state in the nation to have an online registry for white-collar criminals. We’ve also undertaken significant educational training to protect people from fraud.

As our prosecutorial record makes clear, consumer protection is one of our highest priorities. I’ve become very familiar with a particularly harmful form of affinity fraud known as pyramid promotional schemes. Typically, pyramid schemes convince their victims to pay high start-up costs ostensibly to sell a product, yet promise compensation for recruiting other victims to the scheme instead of reselling the product. These schemes also encourage victims to purchase large amounts of product inventory — usually much more than a reasonable person would consume or be able to resell — just to qualify to earn commissions, recognition, and bonuses. Much of this inventory is never used or resold and ends up sitting in victims’ garages, causing great financial harm.

{mosads}Pyramid schemes also harm many honest businesses whose reputations are damaged by unfair association with them. This is particularly the case with direct selling companies that build networks of independent salespeople to sell their goods or services. Pyramid schemes often masquerade as these legal and legitimate businesses. 

The chief distinction between legitimate direct selling companies and pyramid schemes is that a legitimate direct selling company compensates its salesforce for selling a product to a consumer who uses the product. To be sure, salespeople can be consumers themselves. Indeed, many people become involved in direct selling because they enjoy certain products and want to purchase them at a discount. That’s a legitimate transaction, constituting an actual sale to an actual consumer, provided the amount people buy is reasonable and does not pile up in their garages. These legitimate sales deserve to be recognized as such in the law.

There is currently an effort in Congress to enact legislation that would define pyramid schemes and prohibit their operation. To the extent these efforts result in effective legislation that not only seeks to help redress consumer harm when it occurs but actually takes meaningful steps to prevent consumer harm, I applaud and support these efforts by Reps. Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Texas), the co-sponsors of H.R. 3409 Anti-Pyramid Promotional Scheme Act of 2017. A clear and powerful federal statute that enhances the Federal Trade Commission’s authority and ability to prosecute harmful pyramid schemes could greatly benefit consumers and help root out the bad actors within the direct selling industry. It would also complement the work being done within the states, especially in the State of Utah where I serve. Interestingly, all fifty states have laws on the books prohibiting pyramid fraud.

Twenty-one states, including Utah, have anti-pyramid laws that provide a definition of pyramid fraud that differentiates the methods of those scams from the honest practices of legitimate businesses. It is time for a federal counterpart to state law.

I hope members of Congress will take up this issue and follow the example of the states to take strong action to stamp out pyramid schemes. By working with all stakeholders and developing strong and effective statutory language, much needed legislation will hopefully soon become the law of the land.

The Honorable Sean D. Reyes is the 21st Attorney General and first ethnic minority elected statewide in Utah. In 2015, Reyes worked with Utah leadership to create the White Collar Crime Offender Registry, the nation’s first online registry of its kind.