A pyramid scheme is a fraudulent system of making money which requires an endless stream of recruits for success. Recruits (a) give money to recruiters and (b) enlist fresh recruits to give them money.

A pyramid scheme is called a pyramid scheme because of the shape of a pyramid: a three dimensional triangle. If a pyramid were started by a human being at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, etc., the pyramid would involve everyone on earth in just ten layers of people with one con man on top. The human pyramid would be about 60 feet high and the bottom layer would have more than 4.5 billion people!

Diagram below:

1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
100,000,000
1,000,000,000
10,000,000,000

It is easy to see how a pyramid scheme can work, but participating in it (regardless of the form in which it is presented) involves deception and fraud because not everyone will receive the money that is promised in return.

Even the police like pyramid schemes
In 1995-96, at least 67 employees of the Sacramento Police Department, including 45 officers, were investigated for their alleged involvement in a pyramid scheme (Sacramento Bee 10/28/95, 11/1/95 and 11/15 & 16/96). The scheme was similar to five others that had been operating in southern California, also involving police officers and support staff. The main suspect in the Sacramento scheme was a police captain's wife. The chief of police said that he would try to fire at least seven officers and discipline 60 other police department employees. Nine officers were placed on administrative leave and relieved of their guns and badges. According to a prosecutor, the scheme involved more than 200 people. However, only three of the accused faced criminal misdemeanor charges. Reportedly, some in the scheme made tens of thousands of dollars. The minimum amount lost by those who were on the bottom of the pyramid was $500.

The police pyramid schemes are called "investment clubs" and have attractive names such as "The Friendship Investment Club" and "A Gift Network." They're sold to investors with the assurance that they are perfectly legal, approved by the IRS or a CPA, and that they definitely are not a pyramid scheme.

The Sacramento scheme was called The Freedom Club or something like that. And it was hyped by a police officer as being legal because it required people to sign a waiver claiming that they were making an unconditional gift to the Freedom Club. A local news reporter, Mike Boyd, asked an IRS agent if this waiver meant the Freedom Club wasn't a pyramid scheme. The IRS agent said that since the people who were signing the waiver expected to get back money for the money they were allegedly making a gift of, the money wasn't really a gift. An attorney, also interviewed by Boyd, agreed that just signing a paper saying you're making an unconditional gift didn't make it so if your intention was not to make an unconditional gift. (Receiving gifts, of course, is legal, and tax free.) The cops and their recruits for the Freedom Club put in at least $500 each and expected something like $4,000 in return for their phony gifts, according to Boyd. The Bee reported that sources told them that some Police Department personnel got more than $10,000 out of the scheme. The WINNERS in the scheme got their money from "gifts" to the Freedom Club from those who later joined the Club. Such schemes continue, if the participants are not caught, until there are not enough new recruits to pay off the old ones. That is, they would continue until there were a good number of people who had "given" away $500 and got nothing in return because the scheme folded. The scheme would have to fold eventually, because there can't be an endless stream of recruits.

The Sacramento Police Pyramid scheme involved what we might call "pyramid pods". An organizer (Numero Uno) would start the pod by getting six others to join as organizers. Presumably, the six would be ranked depending on when they were recruited. The organizers pay nothing to join the pod but together they must recruit enough people into the pod to buy eight spots at the bottom of their pyramid. Each spot costs $500. Numero Uno pockets the $4,000. The pod splits into two pods of seven people (or spots) each, with a new Numero Uno in each pod (and a new number 2, 3, 4, 5, 6 and 7). Each pyramid pod recruits more people at $500 for each of eight spots in the pyramid. The two new Numero Unos take their $4,000 each and the two pods split into 4 pods and those 4 into 16, ad infinitum. To make even more money, some joined more than one pod.

How many in this scheme told the new recruits that 6.7% of those who join will get a 700% return on their investment ($3,500 on a $500 investment) as long as 93.3% get nothing? How many advised their recruits to "get in early"?

To have police involved adds a special dimension to this pyramid scheme because (a) officers have ranks and can use their rank for recruiting leverage over those beneath them; (b) officers and ex-officers have positions of authority and trust which will influence potential recruits, especially young people; and (c) police personnel are supposed to enforce the law; when the law enforcers become lawbreakers and encourage others to break the law for monetary gain, respect for law and law officers diminishes.

Robert Todd Carroll
Det. Lynn Weddle 368-9414