Andrew Ceresney, Director Division of Enforcement, testified before Congress regarding the SEC’s latest enforcement efforts. During his testimony, which can be reviewed here, Ceresney brought up the topic of pyramid schemes, stating that it’s one of the SEC’s top priorities. Ceresney stated,
The staff also has recently seen what appears to be an increase in pyramid schemes under the guise of “multi-level marketing” and “network marketing” opportunities. These schemes often target the most vulnerable investors, and social media has expanded their reach. The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education. We are also using new analytic techniques to identify patterns and common threads, thereby permitting earlier detection of potential fraudulent schemes.
Since the Zeek Rewards shutdown, which occurred in August of 2012, the SEC has been very aggressive in shutting down several ponzi / pyramid schemes. Based on its history, the SEC seems to be more focused on ponzi schemes / scam-investment programs. Companies that sell tangible product or legitimate online services seem to stay out of trouble with the SEC (the FTC seems to have a larger interest with the network marketing companies that operate in the gray).
If you’re a distributor for a network marketing company, and you’re selling something real, this information likely has little value for you.
I’m mainly writing this because of the next part of the testimony. It’s titled “Gatekeepers” in the SEC’s document.
A common thread throughout the priority areas identified above is an emphasis on the importance of gatekeepers to our financial system: attorneys, accountants, fund directors, board members, transfer agents, broker-dealers, and other industry professionals who play a critical role in the functioning of the securities industry. Gatekeepers are integral to protecting investors in our financial system because they are best positioned to detect and prevent the compliance breakdowns and fraudulent schemes that cause investor harm. When gatekeepers fail to live up to their responsibilities, the Division has held – and will continue to hold – them accountable.
This applies to me and my competitors along with my fellow vendors that service network marketing companies. The bar is rising, and for good reason. We’ve seen separate scenarios where lawyers, banks, accountants, online marketers, and payment processors all get held responsible for purportedly greasing the wheels for ponzi schemes. In the past (pre-Zeek Rewards shutdown), ponzi schemes were difficult to spot. But today, we have crystal clear guidance on the subject. The SEC has sued a minimum of 8 companies in a few years, alleging them all to be pyramid / ponzi schemes. Also, they’ve provided numerous alerts on the subject, such as this Investor Alert titled “Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.” They’ve also recently provided an update regarding Ponzi Schemes Using Virtual Currencies (which is a space that’s sure to be heating up in the near future).
Bottom line: it’s getting more difficult for vendors (payment processors, lawyers, accountants, etc) to service companies with eyes wide shut. This is especially true with ponzi schemes. When it comes to ponzi schemes, there is no gray. The patterns are clear: auto-reinvestments, limits on withdrawals, points that appreciate in value over time, emphasis of the ROI, steady returns over time, products that are never used, etc.
The SEC has expressed an interest in the network marketing industry, both in words and in action. Granted, they’re primarily suing ponzi schemes that masquerade as network marketing companies. But…that could change. They are currently consulting with notorious FTC economist, Peter VanderNat. In my opinion, Dr. VanderNat is not so much concerned with ponzi schemes as he’d be concerned with pyramid schemes in the MLM family (he was instrumental in several of the FTC’s cases against pyramid schemes).
What should we do with this information? For starters, we need to get more serious about “self-regulation.” Currently, information is NOT being shared publicly when companies cross the line. As a result, we’re not really learning anything about what constitutes good behavior versus bad.
(h/t to Patrick Pretty for bringing the SEC’s testimony to my attention)