Pyramid schemes may also affect the daily operations of banks and taint the banking industry''s overall reputation for safety and soundness. Many pyramid promoters put down the bank industry and promote their own program as a superior alternative to traditional banking and investment. Melvin Ford, a defendant in the SEC''s recent case against International Loan Network, stated that his company''s bonus program was "the most powerful financial system since banking." At the height of his popularity, Charles Ponzi actually proclaimed that he would form a new banking system and divide profits equally between depositors and shareholders.
The FTC v. Cano case demonstrates the impact of pyramid schemes on the banking system and individual banks. In that case, the FTC targeted an alleged Internet pyramid scheme that operated under the name Credit Development International ("CDI"). For an initial payment of $130 and subsequent monthly payments of $30, consumers could join CDI''s "Platinum Infinity Reward Program" and become a participant in its "3x7 Forced Matrix" -- a structure that promised commissions going seven layers deep and that required each participant to recruit just three new members. CDI represented that participants could earn more than $18,000 per month in this program.
Besides the promise of high profits, the real attraction of CDI was its offer of an unsecured Visa or MasterCard, with a $5000 credit limit and a low 6.9% annual financing rate. This offer was especially attractive to consumers with poor credit histories, to whom CDI advertised saying "Guaranteed Approval, No Security Deposit! No Credit Check, No Income Verification and Bankruptcies No Problem!"
CDI representatives claimed that they could offer such attractive terms because they had a special marketing relationship with a large overseas bank, the Banque Nationale de Paris (BNP). According to the transcript of a taped sales meeting, CDI hinted that a broad conspiracy prevented U.S. banks from offering such favorable terms. A CDI representative claimed, "normal banks do not want people to know that they could have a 6.9 [percent] credit card." In the same meeting, CDI painted itself an alternative to a regular bank and said "our whole concept is to have the largest membership credit union in the world." "We''re the bank."
In fact, according to the Commission''s evidence, CDI had no business relationship with Visa, MasterCard, or BNP, and no relationship with any bank willing to issue credit cards to CDI members. The evidence also showed that the defendants likely misled the one bank with which they did have a relationship. When investors paid by credit card to join CDI, the defendants apparently processed these payments, not through CDI but through a different "front" company with a VISA merchant account. Consequently, the defendants put their own merchant bank at risk for any charge backs that VISA might credit to angry investors.
In the end, CDI members never received their credit cards, and according to a government economist, at least 89 percent of them would never have made enough money to recoup their initial investment. Last autumn, the FTC obtained a temporary restraining order and a preliminary injunction against the CDI defendants, as well as a freeze over their assets. The Commission estimates that over the five-month life of CDI, more than 30,000 consumers from the U.S., Europe, Australia, and Southeast Asia lost $3 to $4 million dollars in this alleged scam. The matter is still in litigation and the FTC is seeking to amend its complaint and name additional defendants.
The largest pyramid case brought by the Commission in the 1990''s witnessed how pyramid operators often try to use the international banking system to hide their assets. In FTC v. Fortuna Alliance, the defendants allegedly promised consumers that, for a payment of $250, they would receive profits of over $5,000 per month. The program spawned numerous web sites on the Internet and victimized thousands of investors across 60 different countries. Although the defendants initially operated out of the United States, the Commission discovered they had secreted millions of dollars to offshore bank accounts in Antigua. But international cooperation saved the day. With the aid of the courts and banks in Antigua, the FTC obtained an order against the defendants, requiring them to repatriate over $2 million in offshore assets and pay approximately $7 million in redress to consumers from 60 countries.
