By Jane M. Winand, Legal Assistance Attorney
Pyramid schemes are on the rise and the military community may be a target.
Nonmilitary spouses often find it difficult to work in a traditional job because of frequent military moves and the need to juggle all child care and household matters during frequent deployments of the service member spouse.
Some service members seek to supplement their incomes with work they can perform during off-duty hours. Many consider opportunities to participate in sales organizations that sell household or cosmetic products to friends and neighbors.
These sales organizations promise exciting, income-producing possibilities earned during evening or weekend hours that are convenient for a parent with young children or an employed person seeking additional income.
Frequently, these organizations offer the option of bringing in friends as sales associates.
Many of these organizations are considered “pyramid schemes.” There are legal and illegal pyramid schemes, but the business model is the same. A person is solicited to sign up as a sales agent for a company that sells a product. This new sales agent is also expected to sign up new recruits to both sell products and recruit others as salespersons.
Each person shares commissions from his sales with each higher level of the sales group. It is called a pyramid because the person at the top collects from the second level and each level below. The second level persons collect from the third level and below, and so forth.
Anecdotes about the big money made by those at the top of the group or pyramid help recruit others, at meetings featuring tales of high earnings and enthusiastic speakers who have made it. The recruit is invited to the meeting, usually paid for by all the members of the organization who have brought someone to the meeting.
The truth is, the bigger the pyramid gets, the people at the bottom are usually destined to be disappointed. Instead of big money, those at the bottom lose fees paid for kits and sales materials, and end up with products that they cannot sell because the market is saturated or the products do not live up to expectations.
As noted earlier, when a plan involves the actual selling of a bona fide product or service, it is not an illegal pyramid scheme. Even if legal, the operation is not for everyone. The major financial rewards in most cases are not based upon actual sales of product, but upon the commissions the agents can make on sales of all the agents they have recruited.
All recruited agents are offered the same promise. Clearly, all will not be rewarded equally.
There is another danger for military personnel and Department of Defense civilian employees. The federal ethics rules prohibit certain types of conduct common in pyramid sales operations.
A DoD employee may not knowingly solicit or make solicited sales to other DoD personnel who are junior in rank or position, or to the family members of such personnel either on or off duty.
DoD personnel who violate this regulation by selling or soliciting junior personnel or their family members can be disciplined administratively or judicially. A reprimand, bar to re-enlistment or court-martial are all possible forms of punishment.
Some illegal pyramid operations have been the source of large numbers of complaints to state regulators, charging that the sales pitch misrepresented the product, that products ordered were delivered late or are unusable and could not be returned, or that the parent company went bankrupt immediately after unloading a large supply of the product on its agents.
Before deciding to invest in a pyramid-type operation, think about the amount of the initial investment and the amount you can afford to lose, and try to talk with others who may have tried the plan.
Also consider the solicitation limits for DoD personnel.
If you have a pyramid operation question, contact the Fort Meade Legal Assistance Division. To schedule an appointment, call 301-677-9504 or 301-677-9536.
The office is located at 4217 Morrison St., first floor, Office of the Staff Judge Advocate.